Are Heads of Terms for the sale of land legally binding?
24th February, 2022
The general perception is that a Heads of Terms document for the sale of land sets out the main commercial points agreed in principle between the parties (for example, the price and the extent of the land).
However, Heads of Terms are just the starting point for more detailed negotiations which follow with the parties only being legally bound if and when they enter into a legally binding written contract.
There are, however, circumstances when the heads of terms themselves can be legally binding and the recent Brooke Homes (Brooke Homes (Bicester) Limited -v- Portfolio Property Partners Limited and Others [2021] EWHC 3015 (Ch)) case highlights that there are pitfalls for parties who breach Heads of Terms document.
Land contracts
In addition to the basic requirements for a contract (for example, the acceptance of an offer, payment of consideration and an intention to create legal relations), a contract for the sale of land has to comply with the Law of Property (Miscellaneous Provisions) Act 1989. The land contract has to be in writing, incorporate all the agreed terms in one document (or each exchanged document) and be signed by or on behalf of the parties.
It is possible for the heads of terms to be detailed enough that they can be considered to be capable of creating a binding agreement and that if in writing and signed by the parties for them to satisfy the requirements of the 1989 Act. This happened in a 2019 case involving heads of terms drawn up for the transfer of farmland to settle a family dispute (Abberley v Abberley [2019] EWHC 1564 (Ch))
The Brooke Homes case
Even if Heads of Terms do not create a land contract, there can be consequences for breaching their terms. Brooke Homes (Bicester) Limited (“BHB”) entered into an agreement with Portfolio Property Partners (“PPP”) which the parties named the ‘Heads of Agreement’. This document outlined an intended future agreement for BHB to purchase a significant area of development land from PPP. In doing so it provided that both parties must use ‘all reasonable endeavours’ to enter into a binding contract for the sale of the land, as well as setting out specific terms to be included in such a contract and to act in good faith in doing so.
However, despite years of negotiations, the parties failed to reach an agreement for the sale of the land. As a result, BHB issued proceedings for damages and specific performance against PPP, maintaining that the “Heads of Agreement” had formed a legally binding Agreement for Sale, of which PPP was in breach.
Although the High Court judgment stated that the “Heads of Agreement” did not constitute an enforceable contract for the sale of the land, the provisions in the Heads of Agreement requiring the parties to use ‘all reasonable endeavours’ and to ‘act in good faith’ were enforceable obligations. PPP were held to be in breach of their obligation to use all reasonable endeavours to enter into an Agreement for Sale as they had failed to provide a red line plan marking the parcel of land for sale when it was reasonable for them to do so. PPP were also found to be in breach of their good faith obligations as they had been negotiating and entering into agreements with third parties notwithstanding their exclusivity agreement with BHB under the “Heads of Agreement”.
As a result of such breaches, the High Court ruled that PPP was liable for damages totalling £13.4m , due to BHB’s loss of opportunity to enter into an Agreement for Sale and ultimately acquire the land.
Summary
Whereas Heads of Terms may once have been merely considered a guiding tool to provide direction and clarity during the process of contractual negotiations, there is a risk that they can be considered to form a binding contractual agreement. Steps such as stating that the Heads of Terms are “subject to contract” or are not intended to create a binding legal agreement are always advisable to try to prevent the heads of terms being considered as forming an agreement for the sale of land. The Brooke Homes case also highlights the risk of including obligations to use all reasonable endeavours and to act in good faith in seeking to enter into an agreement for the sale of land, because the courts can award substantial damages for loss of opportunity if those obligations are breached.
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Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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