Australia: Landlord not able to enforce a Heads of Agreement

Casdar Pty Ltd v Fanous (Building and Property) [2017] VCAT 1464

In this case, a landlord tried to enforce a Heads of Agreement, claiming that it was a binding lease. The Heads of Agreement had many elements that might indicate that it was binding.

The Tribunal found faults in those elements. The Tribunal also looked at both party's behaviour after the Heads of Agreement was signed, and found that their behaviour was not consistent with an understanding that the Heads of Agreement was binding.

The case demonstrates the difficulty that a lessor may face when seeking to enforce a Heads of Agreement.

The custom for entering into leases has involved the landlord drafting a Heads of Agreement that reflects negotiated commercial terms. The tenant will sign that Heads of Agreement and return it to the landlord. A Lease will be drafted, there may be more negotiation and then that Lease will be signed.

An alternative to that process is that the landlord and tenant are bound once the Heads of Agreement is signed. A Lease may be drawn up later and signed by both parties, however, neither party can withdraw from the deal.

Courts have permitted parties to proceed under this alternative process (and enforce the terms of the Heads of Agreement) on the basis that either:

  • The parties have reached final agreement on the terms of their contract and intend to be bound immediately on signing the Heads of Agreement but wish to restate those terms at a later stage in a more precise way in a formal document not different in effect;
  • or

  • The parties are content to be bound immediately and exclusively by the terms set out in the Heads of Agreement while expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms.

This case shows that Courts and Tribunals may prefer the customary process (non-binding Heads of Agreement) and carefully review the terms of the Heads of Agreement and both party's subsequent behaviour before allowing one party to enforce a Heads of Agreement as binding.

The Heads of Agreement in this case contained the following terms (among others):

Commencement date for lease – From signing of Heads of Agreement (to be signed within 7 days)
Special condition 3 – Agreement for Lease and Lease subject to lessee's lawyer's final approval within 7 days after the lessor provides the Heads of Agreement [to the] Lessee.
Note – If the lease is under a company name, the landlord will require a guarantee from the two owners.

The Tribunal analysed these parts of the Heads of Agreement to see whether the parties intended that they would be bound immediately, or whether they intended that they would only be bound when another document (a lease) was drawn up and signed.

There were 4 deficiencies in the Heads of Agreement that indicated to the Tribunal that the parties did not intend to be immediately bound:

  1. It was called a 'Heads of Agreement' – which indicated that the parties were using the customary method of entering into a lease;
  2. The commencement date was dependant on another document to be signed. The Tribunal could not accept that the document referred to was the Heads of Agreement, because that would be too circular – that would mean that the parties signed a document that was intended to be re-signed in another 7 days;
  3. Special Condition 3 suggested additional documents would be drawn up and reviewed by the Lessee's solicitor; and
  4. The 'Note' also suggests that additional documents would be required to bind guarantors.

As well as these deficiencies in the Heads of Agreement:

  1. the Tribunal found that no disclosure statement had been given, which is required by the retail legislation to be given 7 days prior to the Lease being entered into. This suggested that the landlord had not intended for the Heads of Agreement to be binding; and
  2. subsequent correspondence showed that the parties were negotiating the formal lease document, and this indicated that the landlord did not consider itself (or the tenant) bound.

It is possible for a Heads of Agreement document to be binding, and Courts and Tribunals have made such findings in some cases, however, that document and the leasing process needs to consistently show that both parties intended to be immediately bound by signing the Heads of Agreement. Courts and Tribunals will look carefully at the terms of the Heads of Agreement, the leasing process and the subsequent behaviour of the parties. If any part of the process suggests that the parties did not intend to be bound by the Heads of Agreement, it will be difficult to enforce that Heads of Agreement as binding.

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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