172: How to prevent heads of terms from being legally binding
The High Court has held that the parties to a dispute involving land intended to create a legal agreement by agreeing and signing heads of terms.
In Abberley v Abberley  EWHC 1564 (Ch), heads of terms were produced following the mediation of a dispute over division of a farm, land and assets. Heads of terms were agreed in all day and night mediation between the parents and two siblings. A manuscript agreement was signed by both parties’ solicitors, but no colour plans were attached identifying areas of land to be transferred.
Terms continued to be discussed for some months after the mediation. A later attendance note of the mediation mentioned additional terms that had been agreed at the meeting. This included noting that a further transfer of land, a farm business tenancy and cross indemnities would need to be entered into separately.
Eventually, one of the parties instructed a solicitor saying that the heads of terms agreed in the mediation were not binding as they were insufficiently certain or complete to amount to a contract, and did not identify the land to be transferred by reference to a plan.
However, the High Court held that the heads of term were capable of amounting to a binding agreement for the following reasons:
- all the terms agreed at the mediation were incorporated into the signed heads of terms which were intended to create a legal agreement and were found to comply with the statutory requirements;
- the heads of terms were set out in a document signed by both parties’ solicitor with sufficient certainty to be capable of amounting to a binding agreement; and
- the heads of terms did envisage a further transfer and farm business tenancy would be entered into, but did not contemplate any other formal agreement following the mediation. The land to be transferred could be identified by other evidence given by witnesses who attended the mediation.
This is an interesting case as heads of terms in property transactions are not normally expected to be legally binding. However, this particular family mediation required the heads of terms to be a binding agreement in order to resolve the dispute and this decision was made by the judge in the light of the very particular facts.
If there are pre-contract matters that parties do not want to be legally binding, such as heads of terms, then it is best to mark them ‘subject to contract’. The words ‘subject to contract’ are not, however, full-proof and the parties should also expressly state in documentation that the provisions are not intended to be legally binding.