Pretoria Energy Company (Chittering) Limited v Blankley Estates Limited

The issue on this appeal is whether the parties entered into a binding agreement for lease contained in clause 1 of Heads of Terms (“HoT”) signed by the parties on 27 November 2013. Ms Joanne Wicks KC, sitting as a judge of the Business and Property Courts, held that they had not. Her judgment is at [2022] EWHC 1467.

I can take the background facts from the judge’s judgment.

In 2012, Blankney Estates Ltd (“Blankney”) had some unused land at Heath Farm, Metheringham Heath, Lincolnshire, comprising a former flax factory and adjoining field, registered under title number LL302872 (“the site”). It was put in touch with Pretoria Energy Company (Chittering) Ltd (“Pretoria”), which was looking for a site for an anaerobic digestion plant (an “AD plant”). It was Pretoria’s intention to develop three such plants: one, at Chittering, Cambridgeshire, for which planning permission was granted in 2012 and which was in the course of being constructed in 2013. A second opportunity was identified at Mepal, Cambridgeshire, for which planning permission was obtained in 2013. The Heath Farm site would have been the third.

Following some initial discussions, by email of 9 July 2013 Mr Ripley of Pretoria sent Tim Harper, Blankney’s Farm Manager, a written proposal. This had five headings: “Lease”; “Contract Maize Growing”; “Digestate”; “Gas Supply” and “Energy Connection”. These headings reflected the fact that, in addition to the grant of a lease of the site, the parties had been discussing various other commercial arrangements. “Contract Maize Growing” referred to a proposal that Blankney would grow maize to be sold to Pretoria as fuel for the AD plant. “Digestate” is an organic fertiliser, a by-product of the production of biogas through AD. The discussions included the prospect that Pretoria would supply solid and liquid digestate to Blankney from the AD plant. “Gas supply” related to the potential that Pretoria would supply electricity and/or biomethane generated by the AD plant to Blankney. Under the heading “Energy connection”, Pretoria confirmed that it had energy connection sites available to it (for the supply of methane to the National Gas Grid) and was negotiating exact connection points and methods; it asked Blankney to assist and co-operate in regard to any wayleaves required. Under the heading “Lease”, the proposal was for a rent of £150,000 per annum, based upon a “bare land site” and for a 25-year period.

It was common ground that Pretoria would be responsible for obtaining planning permission for the AD plant; and that Pretoria would also construct it. Mr Ripley, who gave evidence on behalf of Pretoria, explained in his witness statement that the rent of £150,000 per annum was what he regarded as “being at the top end of what it would be worth once the plant was constructed.”

Further negotiations took place (which I do not need to recount); and the proposal went through a number of different drafts. The final (but undated) version was signed on 27 November 2013.

The final document was described as “Heads of Terms of Proposed Agreement” and was stated to be “Subject to Full Planning Approval and appropriate consents and easements.” It went on to say that the agreement:

Clause 1, headed “Lease,” provided:

Clause 2 provided for contract maize growing. Clause 3 provided for the supply of digestate; and clause 4 dealt with gas supply. It is common ground that these clauses were not intended to create legally enforceable obligations. Clause 4 did, however, provide (in part):

The final clause, headed “Acceptance”, provided:

It is common ground that this clause created a legally binding lock-out agreement. This, therefore, is an unusual case in which it is common ground that some parts of the same document created binding contractual obligations; but other parts did not.

The issue is whether clause 1 created a contractually binding agreement for lease.

On 21 January 2014 Pretoria applied for planning permission. It had held off doing so until the HoT were signed. On 21 February 2014 Blankney granted Pretoria a licence over a neighbouring field for the growing, harvesting and carting away of single crop of maize. Pretoria also took a lease from another farmer of some 350 acres to be used for growing maize. Planning permission was granted on 11 June 2014. Thereafter, Blankney instructed solicitors to progress the drafting of a lease and also took steps to demolish the former flax factory. At some stage the planning authority objected to the demolition; and those works were temporarily halted.

Following the expiry of the exclusivity period, Mr Banks, one of Blankney’s directors, emailed Pretoria with a view to replacing the lock-out agreement with a new one. But shortly thereafter Blankney lost confidence in Pretoria’s commitment to the project and its ability to deliver it in a timely fashion. Despite Pretoria’s protests to the contrary, the parties could not resolve their differences and on 24 November 2014 Blankney informed Pretoria that it had concluded arrangements with a third party.

The judge set out the general approach to the question whether parties have entered into a binding contract. She formulated the principle by reference to the judgment of Lord Clark in RTS Ltd v Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14, [2010] 1 WLR 753 at [45]:

She went on to say at [26]:

She continued:

I did not understand Mr Pickering KC, for Pretoria, to criticise these self-directions. His main complaint is that, although the judge set out the correct principles, she did not apply them correctly.

Mr Pickering took us at some length through the negotiations and preliminary drafts of the HoT before they came to be signed. Although he accepted that neither negotiations nor preliminary drafts were relevant in interpreting the final signed HoT, he said that he was relying on that material to show context. But in my judgment what we are concerned with is the legal effect of the final signed HoT. That depends on the interpretation of the document as it stands, and I do not consider that the parties’ negotiating positions, or the preliminary drafts have any significant bearing on that question. The broad context is sufficiently summarised in what I have already said.

It is perfectly true that the HoT were not headed “subject to contract” which would have put it beyond doubt that the parties did not intend to be contractually bound by any part of the HoT. But since it is common ground that the parties did intend to be bound by the lock-out agreement, the omission of the phrase “subject to contract” is of less importance than it might have been. Mr Pickering contrasted the absence of the phrase “subject to contract” with the presence of the phrase “subject to planning permission”. That phrase, he said, could only apply to the agreement for lease. Once planning permission had been granted, there was no impediment to a binding agreement for lease coming into existence.

Nevertheless, it is of considerable significance that the parties stipulated that a formal agreement should be drawn up. The significance of a requirement that a formal contract be drawn up was considered by the House of Lords in Rossiter v Miller (1878) 3 App Cas 124. In that case freehold land was offered for sale in lots on the basis of a plan and conditions for sale. One of those conditions required the purchaser, on completing his purchase, to execute a deed of covenant “embodying the above rules and stipulations.” Mr Miller made an offer which was accepted. He subsequently regretted his offer and argued that the fact that a deed of covenant had to be executed meant that there was no binding contract. The House of Lords disagreed. Lord Cairns LC said at 1139:

Lord Hatherley said at 1143 that the mere fact that the parties wished their agreement to be put into due form by a solicitor did not necessarily prevent a concluded contract from arising. But he went on to explain:

Lord O’Hagan said at 1149:

Lord Blackburn said at 1151:

What is envisaged, then, is that the formal contract will do no more than put into formal language that which the parties have already agreed. Branca v Cobarro [1947] 1 KB 854 is a similar case. The parties in that case agreed to sell the lease and goodwill of a mushroom farm. The written document stated that it was “a provisional agreement until a fully legalized agreement, drawn up by a solicitor and embodying all the conditions herein stated is signed. Lord Greene MR said at 857:

RTS Flexible Systems (cited above) was a case in which it was common ground that, at least initially, the parties did enter into a binding contract. It was also another case in which the detailed terms of the contract had been agreed (see Lord Clarke’s judgment at [61]), and the principal issue was whether a “subject to contract” condition had been waived.

In the case of an agreement, not to sell an existing estate, but to create an entirely new leasehold estate for 25 years, the reference to a formal agreement has added significance. In Winn v Bull (1877) 7 Ch D 29 Mr Bull agreed to take a lease of a house for 7 years. The agreement stated that it was made “subject to the preparation and approval of a formal contract”. Sir George Jessel MR stressed the difference between a contract for the sale of land and a contract for lease. He said at 31:

As Morritt V-C put it in Cheverny (to which the judge referred) at [42]:

In this case, the grant of a lease for 25 years of an AD plant which was yet to be built is undoubtedly at the “more complicated” end of the spectrum. Morritt V-C continued at [45]:

Indeed, it is striking that when, some months after the HoT, a draft lease prepared by Pretoria’s solicitors was mooted as the basis for the lease it ran to over 40 pages. The idea that that draft was merely embodying terms that had already been agreed is, in my judgment, untenable.

In Mamidoil (to which the judge referred and to which Mr Pickering took us) the statement of principle by Rix LJ at [69] clearly distinguishes between cases where no contract exists and cases where a contract does exist but is said to be incomplete. We are, of course, concerned with the question whether a binding contract for lease exists at all.

In addition, as I have said, it would have been inappropriate for the whole of the HoT to have been declared to be “subject to contract” because it was common ground that (at least) the lock out agreement was intended to be legally binding. I agree with the judge that this is not a strong point.

Mr Pickering laid some stress on the fact that Pretoria had incurred expense in obtaining planning permission (which would enure for Blankney’s benefit); and had held off making the application for planning permission until the HoT had been signed. The costs incurred in that exercise were of the order of £74,000. But as Mr Ohrenstein pointed out Pretoria had begun to incur the costs well before the HoT were signed. Indeed, an email from Mr Shaw (for Pretoria) to Mr Banks dated 14 November 2013 (and thus before the HoT were signed) said in terms that Mr Ripley “now has everything prepared for planning to be submitted”. In addition, there was no express obligation which obliged Pretoria to apply for planning permission. It is entirely plausible that a party to a putative contract undertakes expense in the reasonable expectation that agreement will be reached in due course.

The judge relied on a number of principal matters in coming to her conclusion. First, she said that the existence of a binding contract for a 25 year lease was incompatible with the limited period of the lock-out agreement. That latter plainly contemplated that the parties would be free to negotiate with third parties after the expiry of that period. I agree. Mr Pickering goes so far as to say that the judge’s conclusion was “irrational”. He relies on what he asserts is the language of clause 1 of the HoT which the judge described as “redolent of agreement having been reached on the core terms” in contrast to the more tentative language used elsewhere. But that, with respect, does not begin to answer the substance of the judge’s point. If there was a binding agreement for lease for 25 years, what was the point of the time-limited lock out agreement? The clear purport of the lock out agreement was that once it expired either party would be free to negotiate with others. Mr Pickering’s answer to this question was that the lock out agreement should be confined to clauses 2, 3 and 4 of the HoT, which did not create binding legal obligations. But in the first place this assumes that the parties intended to be bound by clause 1 which is the very question to be decided. Second, “the arrangements being negotiated” is an entirely general phrase, and there is, in my judgment, nothing in the language or the context to confine its application to clause 2, 3 and 4 alone. On the contrary, clause 1 of the HoT, which deals with the lease, itself refers to “arrangements” for decommissioning the AD plant. As the judge rightly said, there were still many matters to be negotiated in relation to the proposed lease. They also included the question of an easement, as contemplated by clause 4, which is agreed not to have created a binding obligation. She added, again correctly, that the proposed lease was the part of the HoT that was “most in need of protection from negotiations with third parties”. Mr Pickering also suggested that the lock-out clause could not apply to Pretoria. I do not agree. It would, for example, have prevented Pretoria, during the time covered by the lock out agreement, from seeking a better or cheaper site on which to construct the AD plant. I do not consider that Mr Pickering’s answer is a plausible one.

Second, the judge said, the HoT envisaged that the lease would be contracted out of the Landlord and Tenant Act 1954. That process requires the intending landlord to give notice to the intending tenant and requires the intending tenant to make a declaration (or statutory declaration) that he has understood the consequences of contracting out. All this must be done before the tenant becomes contractually bound. Mr Pickering’s first answer to this point is that the HoT were conditional on the grant of planning permission. Planning permission was not granted until June 2014. Accordingly, it was not until June 2014 that Pretoria became contractually bound. The first flaw in this argument, to my mind, is that it also assumes the answer to the very question that must be decided. In other words, it assumes that clause 1 of the HoT creates a valid agreement for lease, subject only to the grant of planning permission. The second flaw, to my mind, is that if there was a binding agreement, the implementation of which was suspended until the grant of planning permission, then neither party would have been free to withdraw until it were known that planning permission would not be granted. Mr Pickering confirmed during his oral submissions that on his analysis Pretoria was not free to walk away following the signing of the HoT. In those circumstances, the tenant would have been contractually committed before the procedure for contracting out of the 1954 Act had been undertaken. The whole point of the procedure laid down for contracting out of the 1954 Act is to enable the intending tenant to walk away if the lack of security of tenure is unacceptable. Mr Pickering’s second answer was that there was no evidence that the parties had turned their minds to the mechanics of contracting out of the 1954 Act. But the thought processes of the actual parties are not relevant to the objective appraisal of the HoT. In my judgment the express understanding that the lease would be contracted out of the Landlord and Tenant Act 1954 is another weighty pointer against the conclusion that a binding agreement had been reached, because to hold otherwise would frustrate one of the few provisions relating to the proposed lease that the parties had actually agreed. As Knox J put it in Cardiothoracic Institute v Shrewdcrest Ltd [1986] 1 WLR 368, 377 (at a time when the court needed to approve an agreement to contract out of the 1954 Act):

Third, as the judge said, in the case of a 25 year commercial lease of an unusual property, there were a number of important terms that were left wholly in the air. Although the judge rejected the argument that the physical extent of the demise was too uncertain, she said at [36]:

Again, I agree. But quite apart from the question whether the AD plant should stay or be removed, in the context of a 25 year lease, one would have expected the finalised lease to contain terms about the initial construction of the AD plant, repair, insurance, alienation, use, compliance with planning and environmental controls, alterations and improvements, forfeiture on breach of covenant and so on. No terms dealing with any of those matters were contained in the HoT. As I have said, the draft lease which was to have formed the basis of a formal lease ran to more than 40 pages. Since a binding agreement can only be created if all the terms that the parties have expressly agreed are contained in the written contract, if the HoT did in fact create a binding agreement, either the lease would not contain any provision dealing with those matters or, alternatively, only such terms as satisfied the conditions for the implication of terms would be included. The more obvious inference is that the parties did not intend to be contractually bound by clause 1 of the HoT.

Although, as Mr Pickering submitted, the courts have been prepared to imply terms into contracts for the sale of land where the parties have agreed only the bare essentials, once again this argument assumes that the parties intended to be legally bound, whereas that is the question to be decided. In addition, the analogy between a sale of land and the grant of a lease was firmly rejected in Harvey v Pratt [1965] 1 WLR 1025. I agree with the judge that the grant of a 25 year commercial lease is a wholly different creature from the sale of freehold land, as Sir George Jessel MR said in Winn v Bull.

Those were the judge’s principal reasons for concluding as she did; and I agree with all of them. It may be that if taken individually they could lead to a different conclusion but the cumulative weight of them is, in my judgment, overwhelming. She also referred to a number of other less significant textual features of the HoT to support her conclusion. But I consider that even without those features, the judge’s conclusion was amply justified.

There is one additional point. It will be noted that in RTS Lord Clark said that the relevant question was whether the communications between the parties:

So one question posed is: what terms does the law require as essential for the creation of a legally binding agreement for lease? A lease (or a term of years absolute) is one of two categories of legal estate recognised by the law. Right back to the beginnings of the common law, it has been a requirement of a valid lease that it has a certain beginning and a certain ending. Coke on Littleton put it this way at 45b:

Blackstone’s Commentaries on the Laws of England, vol. II, says, at 143:

These commentators are supported by authority both ancient and modern. In Say v Smith (1563) Plowd 269, 272 Brown J is reported as having said:

All these statements were approved by the House of Lords in Prudential Assurance Co Ltd v London Residuary Body [1992] AC 386.

Similarly, in the Bishop of Bath’s case (1605) 6 Co Rep 34b the court held that:

In more modern times, in Marshall v Berridge (1881) 19 Ch D 233 the parties signed a written memorandum dated 29 June 1880 relating to a lease of ironworks. The memorandum incorporated by reference the terms of an earlier letter by which Mr Marshall agreed to take a lease for a maximum of 21 years, with a right to break the lease at intervals. He was also to have a rent free period of six months to enable him to carry out works. The question was whether it amounted to a binding agreement for lease. Sir George Jessel MR summarised the successful appellant’s argument at 239:

He went on to say at 240:

He then rejected two possible commencement dates for the leasehold term (one being the date of the agreement and the other being the expiry of the rent free period).

Baggallay LJ said at 243:

He referred with approval to an earlier decision of Sir William Grant who had held that there was no binding agreement for lease where the written document:

He then considered, and rejected, the argument that the term should begin from the date of execution of the final document.

Lush LJ said at 244-5:

This principle was reaffirmed in the following century. In Harvey v Pratt the parties signed a document which provided:

It seems to me to be plain from the wording of that document (“to seal this contract”) that the parties intended it to be immediately binding. Nevertheless, this court held unanimously that the document did not create a binding agreement for lease. Lord Denning MR said at 1026:

He went on to reject the argument that a term should be implied to the effect that the lease should begin within a reasonable time; and an alternative implication that the lease should begin on the date of the document. Davis LJ said at 1027:

Russell LJ said:

The time from which the term of a lease is to begin is, in my judgment, a term that the law regards as essential to the creation of a binding contract for lease. Thus, even where it is plain that the parties intended to enter into a binding contract for lease, if the time from which the lease is to begin is uncertain, the agreement is incomplete; and there is no binding contract. By the same token, if the start date for the term of the lease is uncertain, it is a very powerful objective indicator that the parties did not intend to be bound.

This was a point raised before the judge (although it is not clear what authorities she was shown), but it is not a point that she discussed in her judgment. This may be because she thought that the point was relevant only to the question whether a concluded agreement was sufficiently certain. But, as she rightly said, although the question of an intention to be bound and the completeness of the bargain are two separate questions, they do not exist in watertight compartments.

Although Mr Pickering raised a procedural objection to this point being taken, it was one that was squarely raised before the judge; it goes directly to the question whether the parties intended to be bound and it deals with ground 3 (2) of the grounds of appeal which asserts that “all essential terms” had been agreed. I do not consider that the procedural objection is well founded.

In some cases, where it is clear that the parties intended to be bound, it is possible to conclude “by reasonable inference from the language used” that the parties have agreed the date from which the term is to run. One such case is Liverpool City Council v Walton Group plc [2002] 1 EGLR 149 where Neuberger J considered a complex agreement for lease, with a detailed draft lease annexed, which provided that a lease for 999 years would be executed within six weeks of a decision notice. Under the terms of the draft lease the lessee was to construct a mixed development including 1.1 million square feet of retail space and additional leisure facilities and car parking. The project was one of regional and national importance. The lease was to be granted at a substantial premium and at no rent. Neuberger J held, following close consideration of the contract and the draft lease, that the term of the lease was to begin on the date of execution of the lease (even though that solution was rejected in both Marshall v Berridge and Harvey v Pratt). Referring to Marshall v Berridge and Harvey v Pratt, he said at [65]:

It is important to note that in Liverpool Neuberger J was considering the position at a time when the contractual time for execution of the lease had not yet arisen. He was not considering what the position might be if the agreed completion date had passed without the lease having been executed. I find some of Neuberger J’s reasoning not entirely easy to follow. He did not, for example, consider the possibility of a backdated term; and his dismissal of the suggestion that the tenant might be bound in equity on the principle of Walsh v Lonsdale (1882) 21 Ch D 9 on the basis that it was “rather quaint” is puzzling. Be that as it may, it was clear beyond doubt that in Liverpool the parties intended to be bound by a very detailed formal contract and a detailed agreement for lease annexed to it, and that is why Neuberger J laid such stress upon the court’s unwillingness to hold what the parties plainly thought was a binding contract to be void for incompleteness or uncertainty. The only issue in Liverpool was whether the agreement for lease was too uncertain. The HoT in this case is a very different kind of document. Unlike Liverpool, the relevant part of the HoT is (to borrow Neuberger J’s language at [48]) “a very short and simple agreement running only to a few lines”.

Is it possible to deduce from the terms of the agreement, with reasonable certainty, when the term was intended to begin? In my judgment, the answer to this question is “no”. In the present case, the final clause of the HoT provided for a formal agreement to be drawn up within one month of planning permission having been achieved. It might have been argued that the contractual completion date was the agreed date on which the 25 year term was to begin. There is, of course, no impediment to the grant of a lease the term of which is expressed to run from a date prior to its execution. But although that was put to Mr Pickering a number of times during the course of his oral submissions, he disavowed it. His argument was that the 25 year term would begin on whatever date the lease happened to be executed, whether that was before or after the expiry of the one month period. I do not consider, contrary to Mr Pickering’s submission, that that is what Neuberger J decided in Liverpool. If he did, then I respectfully disagree. The idea of a “rolling” 25 year term is the antithesis of certainty. As Mr Pickering acknowledged, Pretoria had no 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, therefore, the agreement for lease was contractually binding, but the lease would not come into effect until the date on which it was actually executed, Blankney’s land might be sterilised indefinitely.

It is also of some interest to note that Mr Ripley’s evidence was that the agreed rent was at the top end for a completed AD plant which Pretoria was to construct. It might well have been the case that the parties would have agreed that the full rent would not become payable until the plant had been constructed; and hence that the 25 year term would begin on practical completion of the AD plant. Alternatively, if clause 1 of the HoT was binding, subject only to the grant of planning permission, Pretoria would have become bound to take the lease once planning permission had been granted, and the 25 year term might have run from that date. That was an analogous solution canvassed by Neuberger J in Liverpool.

In addition, unlike Liverpool, this is not a case in which it is clear that the parties did intend to create a binding obligation to enter into a lease, and where the court is faced with the task of saving what the parties clearly understood to be a binding contract but which is alleged to be incomplete on very technical grounds. On the contrary, as I have said more than once, that is the very question to be decided. As the judge said, the more vague and uncertain an agreement is, the less likely it is that the parties intended it to be legally binding. That, to my mind, is another reason for upholding the judge’s conclusion.

I would dismiss the appeal.

I agree.

I also agree.