For any business owner that intends to operate from a premises or has had experience with commercial lease negotiations, they will know negotiations or discussions do not necessarily guarantee a lease. This not only applies to the possible terms and conditions of the lease but also in considering whether a lease has been formed. It can get tricky. Below, we look at what makes a contract binding, specifically referencing recent decisions and agreements affecting leases.
What is a Binding Contract?
A lease is, in essence, a contractual document. To determine whether a lease had been formed or if a lease is binding, you will need to determine whether the elements of a contract have been satisfied. This means that the following must have happened:
- An offer;
- An acceptance;
- Consideration (e.g. an exchange of money or liability); and
- An intention to create a legal relationship.
Although the categories seem distinct, contractual disputes do arise – particularly for leases and an agreement for a lease where there is considerable negotiation involved between all parties.
What is an Agreement for Lease?
An agreement for lease refers to a legally binding contract committing both parties to enter into a lease at a future date. The agreement for a lease differs from the actual lease as it does not provide the prospective tenant with possession of a premises. It is commonly used in circumstances where the building/centre is still under development, where the future tenant requires a new fit out, or the requisite development applications are yet to be finalised.
Commercial Lease Negotiations
Lease negotiations are inevitable not only at the commencement of the lease but also when a lease is up for renewal.
In OXS Pty Ltd v Sydney Harbour Foreshore Authority  NSWCA 120, the tenant, OXS, had a lease of the premises and operated a restaurant. The landlord was the public authority Sydney Harbour Foreshore Authority (SHFA). OXS had a lease that began in 2009 and terminated in 2014. In 2009, SHFA issued a lease renegotiation policy outlining the process for negotiation of the lease. In 2011, OXS requested an extension of the lease for seven years. SHFA responded with a letter stating they were “prepared to offer” a new lease for ten years subject to OXS meeting certain conditions. OXS replied by accepting the offer as set out in the letter. SHFA later withdrew the offer as the relevant minister would not consent to the lease (as required by the Sydney Harbour Foreshore Authority Act 1998 (NSW)). The Court decided that no binding agreement for lease was formed.
In deciding whether an agreement for lease was formed, the court stated:
- There was no intention to be bound; and
- There were no particular contractual terms contained in the letter, e.g. price, turnover rent, rent reviews, etc.
In analysing whether an intention to be bound existed, the Court considered the language used in the letter (e.g. “prepared to offer”), the informality of the letter and prior formal negotiation procedures undertaken by SHFA and OXS.
When it comes to determining whether a contract is binding (e.g. an agreement for a lease), the court will consider the negotiations between both parties in detail. This detail can come down to the content of any written communication, prior practices regarding negotiation and the exact terms of what parties had agreed.
Importantly, despite any negotiation parties have undertaken, in the absence of a concluded agreement, it’s difficult to confirm that the contract will be binding. This is because the court may only determine that a contract has formed if there are commercial terms that can be concluded.
If you have any questions about negotiating your commercial lease or need assistance drafting its terms, get in touch with our commercial leasing lawyers on 1300 544 755.