Court of Appeal Ruling on When a Binding Contract Exists

In the context of a commercial property dispute concerning the proposed erection of an anaerobic digestion plant, the Court of Appeal has given important guidance on how to distinguish a binding contract from a non-binding agreement to agree.

A landowner entered into negotiations with an energy company that wished to site the plant on its land. Heads of terms were signed whereby it was agreed that a 25-year lease, at a rent of £150,000 a year, would be drawn up within one month of planning permission for the development being granted.

Such permission was duly obtained, but the landowner subsequently lost confidence in the company and concluded a deal with a third party. The company argued that, subject only to the grant of planning permission, the heads of terms constituted a binding contract to enter into a lease from which the landowner was not entitled to walk away. Its arguments, however, failed to persuade a judge.

Rejecting the company’s challenge to that outcome, the Court noted that the heads of terms included an exclusivity or lock-out clause which was agreed to be binding and which precluded either party from entering into negotiations with third parties for a period of about eight months.

The Court questioned whether there would have been a need for such a time-limited lock-out clause had a binding agreement for a 25-year lease been completed. The clear import of the clause was that, once the exclusivity period expired, either party would be free to negotiate with others, as the landowner proceeded to do.

The heads of terms also envisaged that the prospective lease would be contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954. Such a course requires intended tenants to make a formal declaration that they have understood the consequences of contracting out before they become contractually bound to take a lease. The fact that no such declaration had been made was a weighty pointer against a conclusion that a binding agreement had been reached.

The heads of terms left a number of important issues entirely up in the air: they did not address such matters as regulatory compliance and how the plant was to be constructed, repaired or insured. The question of whether it would be removed or retained at the end of the 25-year term was expressly parked for further discussion.

The heads of terms did not impose on the company any express obligation to apply for planning permission and, even if such an obligation were to be implied, there was no timetable for making such an application. If the heads of terms had created a binding contract for a lease, the relevant land might therefore have been sterilised indefinitely. Overall, the Court ruled that the judge’s conclusion was amply justified.

Pretoria Energy Company (Chittering) Limited v Blankney Estates Limited.