Most property deals start with heads of terms. Often these are quite detailed, to ensure the commercial arrangement is clearly set out. Once heads of terms are agreed, the parties and their lawyers turn these into a formal legal agreement.
But what happens if a formal legal agreement is never finalised? Are the heads of terms binding?
No, said the Court of Appeal in the recent case of Generator Developments v Lidl UK. This case is a reminder that heads of terms are not legally enforceable and parties should not rely on them for contractual protection. A deal is only truly agreed once both parties have signed formal documents and the transaction is completed.
In this case, Generator and Lidl entered into negotiations for a joint venture to acquire a development site in Essex. The two companies put in an offer to purchase the property, which the owner accepted. It helped that the owner was a friend of Generator's managing director.
The heads of terms for the sale were headed "subject to contact" and named Lidl as sole purchaser and Generator as "delivery partner". The intention was that Lidl would buy the property and then transfer it to Generator for development. Lidl would then take a leaseback of a newly built supermarket store.
The seller and the two joint venture partners signed an exclusivity agreement whilst discussion continued on the details. Draft heads of terms for the joint venture were circulated, again marked "subject to contract" and subject to board approval. There were negotiations between the Generator and Lidl but heads of terms were never finalised.
Shortly after the exclusivity agreement expired, Lidl went ahead and purchased the site in its own name. Negotiations for the joint venture continued briefly but eventually fell through. Lidl then marketed the site to the wider market in its own right, without involving Generator.
Disappointed by this turn of events, Generator claimed that it had acquired a 50% equitable interest in the property by way of a constructive trust, because the intention was that Lidl would acquire the property for their joint benefit.
Generator relied on a well-known case from 1953 where two buyers were interested in acquiring a piece of land at auction. Their agents agreed that one of them would stand aside and, if the other one bought the land, they would divide it up. Having secured the land, the new owner reneged on the deal. The court in that case ruled that he was holding the land on trust for himself and the other buyer.
The Court of Appeal said that here the facts were quite different. Lidl and Generator had been negotiating on an express "subject to contract" basis. Both parties were commercial entities advised by lawyers. It is possible the decision may have been different if one of the parties was an inexperienced individual or without professional representation.
Although there may well be limited exceptions on the facts, the general principle is clear: heads of terms are not binding. Well-advised parties should not treat heads of terms as a legal contract, but should fully document any commercial deal before placing reliance on what the parties have "agreed".