Both landlords and tenants should take care to ensure that the
other party is bound by the lease rather than incurring significant
expenses on the assumption that the lease will proceed.
Landlords and tenants often begin spending money or incurring
costs to create and fitout leased premises prior to the
commencement date of the lease. The parties may have negotiated and
agreed in principle on the terms of the lease, and one party
(usually the tenant) may have even signed the lease. However, both
parties may not actually be bound by the lease.
If a party incurs costs in relation to the premises before both
parties are bound to the lease, then that money may be lost if the
other party withdraws from the lease before the lease becomes
What expenses are typically incurred by a tenant?
A tenant will typically incur expenses in connection with the
design and fitout of the premises. These expenses may be
significant even if only the design element is completed. If a
tenant incurs such expenses before the landlord is bound by the
lease, and either the landlord or the tenant withdraws from the
lease (in circumstances where it is entitled to do so), the tenant
may not be entitled to recover those expenses from the
What expenses are typically incurred by a landlord?
A landlord may agree to carry out certain works to the premises
as an incentive for the tenant to enter into the lease.
Common examples include installing inter-tenancy walls to subdivide
a larger space, or redecoration works to upgrade the premises. If
either party later withdraws from the lease, apart from having
expended money on the relevant works, the landlord may also incur
additional costs to undo the works if the landlord is unable to
find a new tenant to lease the premises in the same condition.
When is a party bound to the lease?
The point at which one or both parties are bound to a lease
depends on the terms of the heads of agreement, the lease and any
agreement reached between the parties before the expenses are
It is common for the heads of agreement to provide that the
lease is not binding until the lease is signed by both parties.
It is difficult to change the position expressly set out in the
heads of agreement or the lease simply by the behaviour of one or
both parties or simply because one party has expended money on the
assumption that the lease would proceed.
To avoid situations such as the ones discussed in this article,
landlords and tenants need to be aware of when the lease becomes
binding. If the lease is not binding before one party needs to
incur significant expenses, then it is advisable to consider
entering into a separate formal agreement confirming that both
parties are bound to the lease.
Swaab Attorneys was the highest ranking law firm and the
13th best place to work in Australia in the 2010 Business Review
Weekly Best Places to Work Awards. The firm was a finalist in the
2010 BRW Client Choice Awards for client service and was named the
winner in the 2009 Australasian Legal Business Employer of Choice
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The Council announced planning policies to encourage more inner suburban retirement village and aged care development.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).