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25.02.2022

News

When is an agreement to lease legally binding?

Two recent cases serve as a timely reminder of the importance of communication during lease negotiations. Parties should be careful to ensure any negotiations are documented with as much detail as possible and, where applicable, include express qualifications as to whether they intend to enter a legally binding contract. 


Artesian Hospitality Pty Ltd Case

Background

The parties signed an agreement for a lease of premises in Fortitude Valley, Brisbane which provided any lease would be subject to—

  • the lessee’s satisfaction with due diligence enquiries
  • the parties using reasonable endeavours to finalise a lease on the basis of the agreement within 30 days of satisfactory due diligence. 

The agreement contained a definition of ‘capital works’ to be undertaken and paid for by the lessor prior to the commencement of the lease.  However, despite the parties having agreed to the definition within the agreement, issues arose as to what was to be included in the definition of ‘capital works’ in the lease itself.  Soon after the 30-day post-due-diligence period had passed, the lessor terminated the agreement on the basis the terms requested by the lessee differed from those originally agreed upon.  The lessee commenced proceedings against the lessor seeking an order for a lease be granted on the terms contained in the agreement.

Decision

Considering the intention of the parties, based on the correspondence and the terms of the agreement, the court said it was a legally binding agreement. However, the court noted the agreement was not an agreement to lease, but merely an agreement to negotiate a lease. This was due to the wording of the agreement which meant the satisfaction of due diligence only imposed an obligation to use reasonable endeavours to execute a lease on the basis of terms in the agreement. Given the continuing disagreement between the parties about the definition of capital works in the lease, the court said the lessor did have the right to terminate the agreement and did not require the lessor to grant the lease.


Ultra Tune Properties Case

Background

The parties entered negotiations for a new lease of a commercial premises on the Gold Coast. Those negotiations comprised various forms of correspondence spanning a one-year period. In particular, the following communications were relevant:

  • A letter in February 2020 from the lessor to the lessee containing a draft lease, which included an express qualification the lessor did “not intend to be bound into a lease agreement by the submission of the draft document”.
  • A letter in May 2020 from the lessee to the lessor responding to certain issues raised in the February letter. Crucially, this letter did not contain any confirmation the draft lease document was not legally binding.
  • An email in October 2020 from the lessee to the lessor stating its director had “effectively signed the lease”.

A dispute then arose about whether the parties had reached a binding and enforceable agreement to lease. 

Decision

The court disagreed with the lessee’s argument that the communications amounted to a final, binding agreement between the parties, subject only to the execution of a formal lease document. The court said the lessor’s qualification it did not intend to be bound in its first letter was sufficient, even though subsequent correspondence did not contain such a statement. Viewing the correspondence objectively, the court said the lessor had not reached a final position on negotiations and dismissed the lessee’s claim.


Next steps?

Take care when negotiating contract terms, and particularly leases, to ensure you do not inadvertently enter a binding agreement. Similarly, where you do intend an agreement to be binding, ensure you clearly express that intention to the other party. Contact our team for assistance with negotiating contract terms for your business. 


Authors

Sarah Sherman

Sarah Sherman

Lawyer

Contact McMahon Clarke

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