PRETORIA ENERGY COMPANY (CHITTERING) LIMITED v BLANKNEY ESTATES LIMITED

A document described as heads of terms may create a binding contract in whole or in part, but its label is not decisive. The question is whether the parties objectively intended to create legal relations and agreed the terms essential to legal effect.

In assessing that question, the court considers the whole course of dealing, including later conduct relevant to intention. A fixed exclusivity provision may indicate that the parties remain free to negotiate a future agreement after the exclusivity period ends. That is inconsistent with an already binding agreement for lease unless the provisions can coherently operate together.

Where a proposed commercial lease concerns unusual property or important matters remain unresolved, the court may conclude that the parties did not intend to be bound before a formal lease was agreed.

The claimant operated anaerobic digestion plants and alleged that heads of terms signed with the defendant created a binding 25-year agreement for the lease of a Lincolnshire site. The defendant contended that the document created only a binding exclusivity or lockout arrangement, lasting until 31 July 2014.

The court tried as a preliminary issue whether the heads of terms were binding and enforceable otherwise than in respect of the lockout provision. The parties accepted that the provisions concerning maize growing, digestate, gas supply and energy connection were not legally binding. The central issue was whether the lease provision itself created an enforceable agreement for lease.

1. Preliminary issue. The heads of terms did not create a binding and enforceable agreement for the grant of a lease. They created a binding lockout provision only. The answer to the preliminary issue was therefore “no”.
2. The court applied the objective approach stated in RTS Ltd v Molkerei Alois Muller GmbH & Co KG. Contractual intention and certainty are distinct questions, although uncertainty may inform whether the parties intended to be bound. The whole course of dealing was relevant, including subsequent events insofar as they illuminated intention.
3. The lockout provision stated that the arrangements being negotiated were exclusive until 31 July 2014. It therefore contemplated that the defendant would thereafter be free to negotiate with third parties. The provision covered the proposed lease as well as the ancillary proposals, since lease terms and related consents and easements remained to be negotiated. That was inconsistent with an already binding agreement for lease.
4. The removal of the adherence amendment, following the defendant’s solicitors’ involvement, supported the conclusion that the parties intended an exclusivity period during which negotiations could proceed, rather than contractual force for the heads of terms. The agreement that the lease would be outside the 1954 Act also indicated that the parties did not intend to be bound before the statutory contracting-out procedure had been completed.
5. Although the heads of terms identified the site, term, rent and review mechanism, the parties had not agreed all terms they regarded as essential. The unresolved treatment of the anaerobic digestion plant at the end of the term was commercially important, and the proposed lease concerned an unusual form of property. The claimant’s expenditure and reliance did not displace the objective indicators against contractual intention.
6. It was unnecessary to decide whether the proposed agreement would have been sufficiently certain under section 2 of the Law of Property (Miscellaneous Provisions) Act 1989.