Dov Ohrenstein, instructed by Roythornes Limited, was successful for the Respondent in the Court of Appeal: Pretoria Energy Company (Chittering) Limited v Blankney Estates Limited [2023] EWCA Civ 482. 

The subject of the appeal was whether a signed document marked “Heads of Terms” but not marked “subject to contract” included a binding agreement for a lease.

The Appellant, Pretoria Energy Company, operates anaerobic digestion (AD) plants producing biogas and electricity from organic matter and the defendant, Blankney Estates, is a farming business in Lincolnshire that owns a site on which Pretoria wished to build and operate an AD plant.

The parties negotiated a document marked “Heads of Terms”. It set out various basic terms under  the heading “Lease” which, for example, identified the site, provided for a lease term of 25 years outside the Landlord and Tenant Act 1954 and  a lease value of £150,000 payable on quarter days subject to RPI review. The parties disagreed about whether the terms concerning the grant of a lease were contractually binding or not. The document included other provisions relating to matters such as the supply of energy which Pretoria conceded were not binding and, in addition, the Heads of Terms included a lockout provision that stipulated an exclusivity period for negotiations which the parties both agreed was binding.

Pretoria’s case was that the Heads of Terms document imposed a contractual obligation on Blankney to grant a 25 year lease of the site. No lease was granted to Pretoria and Pretoria brought a claim alleging that Blankney was in breach of contract and was liable for damages for loss of profit of £56m and £416,000 in reliance losses. At first instance, Ms Joanne Wicks KC, sitting as a deputy High Court judge, held that the parties had not entered a binding agreement for a lease: Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd [2022] EWHC 1467 (Ch). 

Dismissing the Appeal, the Court of Appeal upheld her decision. The Court of Appeal agreed with the trial judge that, on an objective assessment, there was no contractual obligation on the parties to enter into a lease but took a different approach on what evidence was relevant to that assessment.

The trial judge (relying on Global Asset Capital Inc v Aabar Block SARL [2017] EWCA Civ 37) considered that it is necessary to consider the whole course of dealing between the parties in order to decide whether a contract had been made, although negotiations and preliminary drafts are not relevant to the question of interpretation of a contract.  However, the Court of Appeal (while it upheld the judge’s decision) considered that the legal effect of the Heads of Terms depends upon the interpretation of the document as it stands and that any negotiating positions and preliminary drafts have no significant bearing on that question.

While the Heads of Terms were not labelled “subject to contract” (which would have put the matter beyond doubt), it was held to be of considerable significance that the parties’ had stipulated in that document that a formal contract would be drawn up. Referring to Winn v Bull (1877) 7 Ch D 29  the Court of Appeal said that the stipulation was even more important in the context of an alleged agreement to grant a lease. Importantly, such a formal contract would require a detailed lease with numerous provisions going beyond anything expressly or impliedly agreed in the Heads of Terms.

Further, the Court of Appeal applied the same approach as was taken in Cardiothoracic Institute v Shrewdcrest Ltd [1986] 1 WLR 368 to conclude that the fact that the Heads of Terms referred to a lease being granted outside of the Landlord and Tenant Act 1954 was also indicative that there was no intention to enter into a binding agreement to grant a lease in circumstances where the necessary formalities to exclude the provisions of the 1954 Act had not yet been fulfilled.

The Court of Appeal also agreed with the trial judge that the lockout provision in the Heads of Terms which provided for an exclusive negotiating period was incompatible with Pretoria’s assertion that there was a binding agreement.