Australia: That's not what we thought it would mean!: negotiating a lease agreement

Last Updated: 2 February 2015
Article by Ann Spencer

It's no secret that it's a lessee's market out there and landlords are eager to entice and secure potential tenants. If you are looking for new office space, you need to be aware that even before you enter into a formal lease, you can be held to a binding agreement to lease.

Unfortunately a potential tenant recently learnt this the hard way when the District Court handed down its decision in Activ Foundation Incorporated v WBHO-Carr Pty Ltd [2014] WADC 174 on 23 December 2014. The defendant was ordered to pay $657,470.85 for breaching an agreement to lease some office space even though the parties had not executed a formal lease agreement and the defendant had not at any stage occupied the office space.

Kott Gunning comment

Proceed with caution when negotiating with landlords and/or their agents – know the effect of what you are signing and communicating to them. If you are in doubt, always seek legal advice.

Refer below for a detailed summary of the case.

Summary of facts

The plaintiff (Activ Foundation Incorporated) owned some land in Wembley, Western Australia and constructed a three-storey commercial office building with 98 parking bays (Premises). Construction of the Premises was completed in April 2011.

Sometime in 2010 the plaintiff engaged Savills (WA) Pty Ltd (Savills) as agent to market level 2 of the Premises for lease to third parties and by March 2011 a significant proportion was leased. Around about this time the Managing Director of the defendant (WBHO-Carr Pty Ltd) was instructed by the defendant's board of directors to find suitable office space.

The Managing Director viewed the unleased portion of Level 2 of the Premises twice during April 2011 in the presence of a Savills leasing agent.

After the Managing Director's second viewing of the Premises on 18 April 2011, he had a telephone conversation with the leasing agent where he was told, amongst other things, the rental price per square metre, the number of car bays available and the plaintiff's incentive of a 7 month rent-free period. The leasing agent warned the Managing Director that he better make up his mind quickly as they had other prospective tenants. The leasing agent also explained that if the defendant was interested in leasing the Premises, the defendant would have to sign an "offer to lease" and the landlord would then assess its application.

On 19 April 2011 the leasing agent emailed the Managing Director a document titled "Offer to Lease – Commercial Office Premises" (Offer to Lease).

On 21 April 2011 the Managing Director signed the Offer to Lease for and on behalf of the defendant and emailed it to the leasing agent. His signature was witnessed by the defendant's Financial Controller and just below his signature, the Managing Director wrote and initialled the following:

Offer subject to Board (WBHO) approval at scheduled meeting 9/5/11.

The Managing Director's covering email advised the leasing agent that he had been advised that the board approval would be a "rubber stamp" exercise.

The Offer to Lease was signed by the plaintiff's Chief Executive Officer on 21 April 2011 and the plaintiff advised Savills that it preferred "...this offer over the [other] offer for a range of reasons...".

By 20 May 2011 the leasing agent had not heard whether the Offer to Lease had the defendant's board's approval and so followed up the Managing Director by email. Later that day, the Managing Director responded to the email saying that "[a]ll required approvals [had] finally been communicated to [him]..." and requested that the formal lease preparations begin.

On 30 May 2011 the leasing agent emailed a copy of the draft lease and draft car parking licence for review by the defendant's lawyers. The leasing agent had earlier requested that the defendant pay 2 months' rent in advance.

On 8 June 2011 another representative of the defendant advised Savills by email that it would not be proceeding with the lease of the Premises due to the defendant's recent review of its financial performance and its view that it would not be prudent to commit to a long term lease of 5 years as outlined in the Offer to Lease. The defendant did not pay the 2 months' rent in advance.

Plaintiff's claim

The plaintiff contended that once the Managing Director communicated that there was board approval of the Offer to Lease on 20 May 2011, the plaintiff and defendant entered into a legally binding agreement whereby the defendant agreed to lease a portion of level 2 of the Premises for 5 years and to simultaneously take on a licence for 21 parking bays.

Defendant's position

The defendant contended that there was no binding agreement between the plaintiff and the defendant. Essentially, the executed Offer to Lease and confirmation of board approval was submitted to be merely an informal offer to lease the Premises which was ultimately subject to a formal binding lease agreement between the parties. In the alternative, the defendant submitted that once the plaintiff was informed of the board's approval, the agreement between the parties was only to negotiate a lease and car parking licence.

The judgment

Derrick DCJ identified the following questions for his determination:

  1. Did the signed Offer to Lease constitute a legally binding agreement once the board's approval was communicated?
  2. If the signed Offer of Lease was a legally binding agreement, was that agreement:
    • a 5 year commercial lease and a car parking licence? or
    • an agreement to negotiate a lease and car parking licence?
  1. If there was a legally binding agreement, did the defendant breach the agreement?
  2. If the defendant breached the agreement, what damages are payable to the plaintiff?

In answer to His questions, His Honour found as follows:

  1. The circumstances which surrounded the Managing Director's signing of the Offer of Lease and communication of the board's approval supported the conclusion that the Offer to Lease created a legally binding agreement between the parties. Despite the fact that the Offer to Lease envisaged further negotiations between the parties and the addition of terms, this did not lead to the conclusion that it was not intended to be legally binding.
  2. The nature and intention of the legally binding agreement was to lease the Premises to the defendant for 5 years and to grant a car parking licence. The circumstances which supported this objective conclusion included the following, amongst others:
    • The Offer to Lease was a formal document in terms of its structure and content. His Honour made mention of the fact that the approval and acceptance clauses were expressed formally.
    • The Offer to Lease began with the following words:
    • The Lessee described below hereby offers to lease from the Lessor described below the premises described below on terms and conditions as set out hereunder.
      [emphasis added]
    • The Offer to Lease was a 20-clause document which went beyond specifying the bare essentials of a lease. Notably, it did not include any term that stated the offer was subject to the parties signing a formal lease but it did include clauses in respect of the rent payable, lease term and options, the lease commencement date, rent review structure, details of variable outgoings and the date of possession for the defendant for the purpose of fitting out.
    • The fact that the defendant was actively looking for office premises and the Managing Director had inspected the Premises twice. It also took the Managing Director two days to return the signed Offer to Lease, giving him an opportunity to review the document and present any queries to Savills.
  1. The defendant breached the agreement. The defendant's subsequent notification (by email dated 8 June 2011) to not proceed with the lease was a breach of the lease agreement by repudiation. Thereafter the plaintiff accepted the defendant's repudiation and terminated the lease.
  2. In accordance with general contractual principals which apply to breach and repudiation of a lease, the innocent party suing for breach of contract is entitled to be placed in the same position as if the contract had been performed, to the extent that money can do this. The plaintiff was awarded the following damages (inclusive of interest to the date of trial):
  • loss of rent                           $421,732.45
    This figure was the difference between the profit the plaintiff made on the lease area of level 2 of the Premises (as contemplated by the Offer to Lease) and the benefit of the rent it would have made from the defendant for the whole term of the lease.  It was noted that the lease area was vacant from 11 July 2011 to 1 December 2012.
  • outgoings                              $48,671.09
    These being those amounts recoverable from a tenant such as council rates. Without a tenant, the plaintiff would have incurred those costs.
  • car park licence fees             $57,148.00
  • cost of lease preparation       $1,518.08
  • marketing costs                     $7,021.39
  • construction of corridor          $26,076.00
    This corridor was necessary to accommodate a new tenant and was an expense of the plaintiff.
  • fit out costs                            $95,303.84
    The payment of a new tenant's fit out costs by the plaintiff was necessary to secure that tenant. The plaintiff had to be sure that it was mitigating its loss. 

Total: $657,470.85

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.

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Ann Spencer
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