In the recent case of Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd  WASC 21, the Court of Appeal of Western Australia held that an email exchange between a tenant and a landlord's agent amounted to an immediately binding agreement for lease and a licence, despite the fact that:
- After the relevant exchange of emails, the parties continued negotiations as to the terms of the lease; and
- No formal lease or licence documents were ultimately agreed upon or signed by the parties.
In this Alert, Partner Richard Gardiner and Solicitor Matthew Jeffrey discuss further.
- The tenant's lease of office premises and licence of six car bays was due to expire on 30 June 2009.
- In May 2009, the landlord and tenant entered into negotiations in relation to a new lease of the premises and licence of the car bays.
- On 4 June 2009, a revised proposal was sent from the landlord's agent to the tenant detailing a number of the terms of the lease, including the duration, rental, rent reviews, outgoings, make-good provisions, bank guarantee, GST and the terms of the car bay licence. The email asked the tenant to "confirm in writing...that these terms are acceptable".
- The revised proposal stated that "the Lessor's standard Lease and Licence shall be utilised to document and [sic] agreement between the parties, and shall be prepared by the Lessor's solicitors incorporating the relevant terms contained within this proposal".
- On 10 June 2009 the tenant sent an email to the landlord's agent stating that it was happy with the terms of the revised proposal, but was waiting on acceptance from its sub-tenant of the terms of the revised proposal. Later that day, the tenant sent an email to the landlord's agent that stated:
"We have received our sub-tenants [sic] approval of the terms as well. Please proceed with wrapping this up."
- A draft lease agreement and licence agreement were subsequently prepared by the landlord's solicitors and sent to the tenant on 2 July 2009. The tenant delayed in reviewing, signing or returning those documents.
- In August 2009 the tenant communicated to the landlord that it was unhappy with certain terms of the lease documents. There were subsequent communications between the landlord's agent and tenant, however the tenant did not execute the lease or licence agreement documents. The tenant's position was that there was no concluded agreement, that it was only occupying the premises on the holding over provisions of the original lease and would soon be vacating.
The fundamental question to be determined by the court was whether the parties intended that, upon the tenant accepting the revised proposal, there should be a concluded and binding agreement to lease the premises and take a licence in respect of six car bays. Part of that inquiry required the court to determine whether the parties expected to execute formal lease and licence agreements in substitution for the earlier agreement, which would contain additional terms by consensus and after negotiation.
The Court determined that there was an immediately binding agreement, and that agreement would be superseded by formal lease and licence agreement once drafted and executed. The test applied by the court incorporated an objective assessment of the state of affairs between the parties, specifically, what was said or done, having regard to the circumstances in which those statements and actions happened. In that regard, the basis for the Court's determination included the following points:
- When the tenant accepted the revised proposal:
- it had been in occupation of the premises since 1 July 2003 and was familiar with the suitability of the premises;
- it had not and was not endeavouring to identify any alternate premises to lease; and
- its sub-tenant had approved the terms of the revised proposal.
- The tenant was very familiar with the landlord and was therefore in a position to make a decision as to whether the landlord was reliable and trustworthy.
- The duration of the new lease was identical to the duration of the initial lease.
- The revised proposal did not contain any provisions that were more onerous or less advantageous to the tenant than those contained the initial lease.
- Upon the tenant accepting the revised proposal, no matters of legal or commercial significance were left to future negotiations.
- The fact that subsequent negotiations between the parties may not culminate in the execution of formal agreements did not affect the binding and enforceable character of the agreement made upon the tenant accepting the revised proposal.
After having regard to all the circumstances the Court was satisfied that both the tenant and landlord were willing and did bind themselves to a new lease and licence. The subsequent negotiations, dealings and communication between the parties (including their failure to agree upon and sign more formal lease documents) did not destroy the earlier concluded binding agreement.
The outcome of this case serves as a timely reminder to parties who are negotiating lease agreements (or agreements in general) that caution must be taken when communicating with the other party as to the nature of the communications. If it is intended that certain negotiations are not to be binding, then that should be clearly communicated at the outset (and throughout negotiations), including noting that any negotiations regarding the agreement are subject to a formal written and executed document setting out the final terms of the agreement concluded between the parties. If such precaution is not taken, parties may find themselves bound to agreements containing terms which they are unhappy with.
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