Apartments and office buildings

“I’m not bound.” “Yes you are!” “No I’m not!” - The tricks and traps of heads of agreements

Mark McKinley, Eleanor Athanasiou and William Reid
Sometimes it can be difficult to clearly distinguish between what does and does not constitute a binding agreement. Are we still negotiating? Is this deal done?

The case of ACME Properties Pty Ltd v Perpetual Corporate Trust Limited as trustee for Braeside Trust [2019] FCA 1189 ended with the Federal Court making a number of important acknowledgements that ought to encourage caution in leasing agents, landlords and tenants throughout lease negotiations.

The case concerns a dispute over the binding nature of an offer to lease an industrial premises, and saw the Federal Court adjudicate something which is relevant to tenants, landlords and leasing agents alike: Did the parties intend to create legal relations and be bound by those legal relations when entering into the offer to lease? 

It is a reminder of the importance of clearly and properly communicating intent throughout the negotiation process.

ACME Properties Pty Ltd (tenant) was the existing tenant of a property located in Braeside. A deed of variation and extension of lease for a smaller section of the same premises was the subject of negotiation. The offer to lease (Offer), containing the commercial terms on which the deed would be based, was the culmination of six months of negotiations that took place mostly via email between the landlord, the landlord’s agent (agent), and the tenant. The Offer was signed on 4 April 2019 by the tenant and by the agent. Crucially, the signed Offer contained an “Approvals” statement, which read:

“This offer is subject to:

  • Formal approval of the Landlord to be given or withheld in its absolute discretion; and
  • Execution of all legal document documentation by the Landlord and Tenant.

On 30 April 2019 the agent emailed the tenant alleging that no legally binding contract had been made, and that the landlord would not be proceeding with the Deed as proposed by the Offer.

The agent advised that the landlord would instead accept an offer from a third party to lease the premises. The agent proposed to extend the expiry date (by approximately one month) under the lease to allow the tenant sufficient time to relocate. The Offer, however, would have provided the tenant with a further 6 months from the date of expiry. 

The tenant brought proceedings against the landlord alleging that it was the intention of the parties that the offer to lease be binding, and that this bound the landlord to lease the premises to the tenant.

In response to this, the landlord relied on the wording of the “Approvals” statement as evidence that the Offer was intended to be non-binding.

The Federal Court found in favour of the landlord, concluding that the intention of the parties as documented by the Offer did not constitute a binding agreement because the Offer was expressed as being subject to contract, or formal documentation, and the natural meaning of this is that the Offer contained the intended basis for a future contract, but was not a binding contract itself.

Perhaps most importantly, the Federal Court made a number of important acknowledgements that ought to encourage caution in leasing agents, landlords and tenants throughout lease negotiations. The Court noted that:

  1. Although the Offer covered most of the commercial terms for the proposed lease, and used wording such as ‘offer’ and ‘open for acceptance’, this was outweighed by the strength of the terms contained in the ‘Approvals’ section (see above); and
  2. Although the tenant clearly had a “commercial need for certainty” with respect to the lease (and approached the negotiations accordingly), neither the context nor legal precedent allowed the conclusion the Offer was legally binding.

The case is a reminder of the importance of clearly and properly communicating intent throughout the negotiation process. Where landlords or tenants wish to enter into an agreement or offer to lease that binds both parties, or conversely wish to ensure an offer is not binding, they should seek legal advice.

It is important for parties to a lease to understand the implications of entering into an agreement or offer to lease. Russell Kennedy’s leasing team has the experience and expertise to guide landlords and tenants through the documentation and negotiation stage. Please contact Eleanor Athanasiou or Mark McKinley if you require any assistance.

If you would like to keep in touch with alerts and insights from our expert Property team, you can subscribe to our mailing list here.

View related insights

Property Cover - 360x240

Crucial changes to the Sale of Land Act 1962 (Vic) are coming into effect on 1 March 2020. How can developers avoid some costly mistakes?

18 Feb 2020

The final changes from the Sale of Land Amendment Act 2019 (Vic) (Amendment Act) come into effect on 1 March 2020.

View
richmond-tigers--thumb-360-240

Retail Leases: Richmond Football Club take out the win, this time in the Supreme Court

26 Nov 2019

The outcome: If the Retail Leases Act applies to a lease at its commencement, it will continue to apply to the lease throughout its term

View
House-rental-360-x-240-thumb

Leasing market reviews

31 Jul 2019

Trips, traps and tips. In most long term leases a mechanism is inserted to increase the rent over time, ostensibly to combat increases in the cost of owning the Premises.

View