There is nothing worse than a change of heart that costs a lot of money. And we are not talking about divorce (although, that also falls into the expensive category).
This article looks at whether once the parties to a commercial lease have signed a Heads of Agreement or other preliminary documents, can they can back out or are the Heads of Agreement binding?
What is a Heads of Agreement
When parties come to an ‘in principle’ agreement to lease property, the agreement is often reduced to writing and a “Heads of Agreement” or “Lease Proposal” is prepared and signed by both parties.
Some recent cases have discussed whether the Heads of Agreement and other informal dealings are binding or, whether they just provide a record of the proposed terms of the lease agreed to by the parties.
Is it Binding?
Generally speaking, a Heads of Agreement is an informal document that records the terms agreed between the parties, and neither party is bound until all parties have signed the lease documents.
However, if the Heads of Agreement states that there is a binding agreement, then an issue arises.
What Does the Court Think?
In Streat v Fantastic Holdings Limited , the court considered whether the Heads of Agreement are binding.
In this case:
- The parties (Landlord and Tenant) had signed a Heads of Agreement;
- The Landlord had prepared the Lease and submitted it to the Tenant;
- The Tenant had signed the Lease; and
- The Landlord changed his mind at the eleventh hour. He tried to withdraw from the deal without signing the Lease and argued that there was no binding agreement until the Landlord signed the Lease.
Importantly, in this case, the Tenant also occupied the property that was the subject of the lease. The Tenant was renewing the Lease and had been paying rent during the term of the Lease and negotiations.
The New South Wales Supreme Court held that in the circumstances of this case, the Tenant was entitled to specific performance (i.e., that the Landlord must sign the Lease and abide by its terms).
The Court based their decision on the fact that:
- the parties always intended to be bound by the deal negotiated between them, and
- the Landlord had sent the Tenant the lease to sign after they signed the Heads of Agreement. The Landlord also continued to accept rent from the Tenant meaning that the landlord intended to proceed with the deal.
What Should Landlords and Tenants do When Documenting a Lease Agreement/ Heads of Agreement?
Given the outcome of Streat v Fantastic Holdings Limited, it is important for both Landlords and Tenants to state whether they intend for their Heads of Agreement to be binding until both parties sign the Lease.
If the parties do not clearly note their intention, then the Heads of Agreement may be binding.
When negotiating a Lease and entering into a Heads of Agreement, we suggest that you:
- Clearly state whether the Heads of Agreement/Lease Proposal is binding or non-binding until all parties sign the lease;
- Confirm that when submitting a lease (if you are the Landlord) or receiving the Lease for review (if you are the Tenant), the parties will not be bound until the parties agree on the final terms, and
- Be clear about the nature of pre-contractual communications and ensure that the Lease’s terms as well as any accompanying documents, such as a car parking licence, are correct.
Accepting Documents Via Email: A Cautionary Tale
Be especially careful with email communication and accepting documents. In Vantage Systems v Priolo Corporation Pty Limited, Western Australia’s Court of Appeal held that one party accepting a revised lease proposal via email amounted to a binding agreement to take a lease and licence of the premises. This is notwithstanding that the proposal was incorrect.
LegalVision has an experienced team of commercial leasing lawyers who can assist you. Should you have any questions, please get in touch on 1300 544 755.