26th July 2022
On 9 May 2023, in judgment  EWCA Civ 482, the High Court’s decision was upheld by the Court of Appeal.
Louise Norbury-Robinson and Kathryn Vickers of our Commercial Dispute Resolution team, specialises in the resolution of real estate- and development- related commercial contract disputes. This article highlights risks associated with pre-contract negotiations and offers practical advice for landowners, occupiers, developers and real estate professionals.
From the outset of any real estate or development deal, landowners, potential occupiers and/or developers liaise with other parties and professionals to consider options, proposals, issues and potential terms. Various discussions, enquiries and negotiations take place before any formal contract documentation is completed.
‘Heads of terms’, ‘commitment letters’, ‘letters of intent’, ‘heads of agreement’, memoranda of ‘intention to proceed’ and the like, are commonly produced prior to completion of formal contracts. The aim is to cater for circumstances where parties nevertheless wish to carry out works, and start to incur costs.
It is often assumed that pre-contract negotiations are not legally binding. However, if not correctly managed, pre-contractual communications or documents can result in a contract being formed. Parties can become contractually bound to terms, obligations and liabilities to which they might never otherwise agree.
It is therefore essential for landowners, occupiers and developers to understand how terms can become binding. They need to know how to conduct negotiations, and how to exchange pre-contract communications and documents, without inadvertently becoming bound to unacceptable terms.
Pretoria Energy v Blankney Estates  concerned a costly misunderstanding between a landowner and a prospective tenant. One party believed that a ‘heads of terms’ document was binding. The other did not. A £56.4 million claim ensued. The case highlights some key takeaways for negotiating parties and their advisers.
The claimant prospective tenant had entered into a document entitled ‘Heads of Terms of Proposed Agreement… Subject to Full Planning Approval and appropriate consents and easements’ (the ‘HoT‘) with the defendant landowner. The claimant contended that the HoT was a binding agreement under which the defendant agreed to grant a lease.
The HoT included site, term, rent, and rent review clauses. It provided that the lease would be contracted out of the security of tenure provisions in the Landlord and Tenant Act 1954. The HoT also contained a lockout clause, which prevented the parties from negotiating with other parties until after a certain date.
When the defendant landowner opened up the sale of its land to a competitive process, the claimant alleged breach of contract and sued for £56.4 million. The defendant argued that the HoT was not binding, other than in respect of the lockout clause. The court agreed with the defendant.
The inclusion of the lockout clause was proof that the HoT was not intended to be binding. If the parties could negotiate with others after the lockout period, it could not be that the defendant was already bound to grant a lease to the claimant.
The reference to the 1954 Act contracting out procedure suggested that there was no intention to create a binding agreement for lease via the HoT. The 1954 Act contracting out process must be completed before a tenant becomes contractually bound to take a lease, and the procedure had not yet been followed.
An earlier draft of the HoT had contained a clause saying: “both parties, on signature, agree to be bound by… adherence to all the terms, pricing and conditions of these Heads of Terms until the Final Agreement is accepted and signed.” Removal of that clause evidenced that the parties did not intend to be bound.
Finally, while key lease terms such as rent etc. had been included, the claimant’s prospective use of the site as an anaerobic digestion plant would require bespoke drafting. The HoT did not, therefore, include agreement of all terms that would be essential for the creation of legally binding relations. This would have undermined the claimant’s ability to establish ‘certainty of terms’, another essential element of a binding legal contract. However, given the conclusion that there was no intention to create legal relations, there was no need for the court to consider certainty.
Pre-contractual communications and negotiations can be a minefield. An understanding of some key contractual principles, as well as an awareness of the practical scenarios in which such risks may arise for any particular business, will be key to getting the balance right between being able to quickly obtain sufficient comfort to enable parties to proceed with their plans, and becoming legally bound only when that is actually required.
If you would like further information or staff training in relation to pre-contract traps and tips, or for advice and assistance if and when any real estate- or development- related contractual dispute does arise, please contact Louise, or Kathryn, who will be very happy to help.
  EWHC 1467 (Ch)
 contrast this with the position in a contractual interpretation dispute, where such evidence would not be admissible. See our earlier briefing for more information.