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Before a landlord and tenant enter into a lease, they may choose to sign a heads of agreement (HOA). However, whether or not an HOA is binding is not always certain. A binding HOA may legally require you to to enter into a lease with your landlord. 

The most important factor when examining whether an HOA is binding or not is the intention of the parties when they signed the HOA. This article will examine: 

  • when HOAs are binding;
  • the benefits of a non-binding HOA; and
  • practical tips that tenants should bear in mind when signing an HOA.

What Is a Heads of Agreement?

An HOA is a preliminary document which is signed before a lease is provided by the landlord to the tenant. While they are not mandatory, HOAs are fairly common practice.  An HOA will usually set out: 

  • the commercial terms of the proposed transaction, including the proposed lease term;
  • any option terms; 
  • key dates; and 
  • financial terms (e.g. rent, any rent incentives and rent review).  

Often, an HOA may require the tenant to provide a rent deposit on signing, which will be applied towards the first month’s rent if the lease is signed, or may be forfeited if the tenant pulls out of signing the lease. 

If an HOA is binding, it is seen as a binding agreement for the parties to then enter into a lease on the same commercial terms as set out in the HOA. This means that it will be difficult to pull out from entering into the lease once you have signed the HOA.

When Is an HOA Binding?

HOAs are usually expressly clear about whether or not the agreement is binding, and you should look out for any terms that state as such.  However, if the HOA is silent on the issue, then it is far less clear cut.

If the HOA does not specify, courts will typically focus on the intention of the parties. The court may determine intention by looking at the: 

  • conduct of the parties both before and after signing the HOA; and 
  • written terms of the HOA itself.  

Benefits of a Non-Binding HOA

In general, it is more beneficial to both parties if the HOA is non-binding. This should be expressly stated in the agreement itself. 

This is recommended to allow you more flexibility down the track. You might wish to pull out of signing the lease after you have signed your HOA for various reasons, such as finding:

  • more appropriate premises for your business elsewhere;
  • that the landlord is difficult to communicate and negotiate with; or
  • issues with the premises you previously did not notice.

Practical Tips for Signing an HOA

Before signing an HOA as a tenant, you should make sure that:

  1. both you and the landlord are clear about your intentions for the document. If you do not intend for it to be binding, you should confirm this with the landlord before signing; and
  2. any important terms or ‘dealbreakers’ are included in your HOA. This will minimise the need to negotiate these terms later down the track or pull out of signing the lease if you are unable to do so. 

Key Takeaways

The key to whether or not HOAs are binding is the intention of the two parties. However, the test for this is subjective and the answer is not always clear. The best policy with HOAs is to ensure that, whatever your intention, you expressly state it in the HOA. This can help you to minimise possible disputes down the track. If you have any concerns about your HOA, contact LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.

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