Australia: Is there a binding lease or agreement for lease?

Last Updated: 6 November 2019
Article by Gillian Kirwan

Darzi Group Pty Ltd v Nolde Pty Ltd [2019] NSWSC 335

The parties entered into negotiations for a retail lease based on terms of a lease executed by the Tenant and submitted to the solicitors of the Landlord with respect to a restaurant premises located in Dorsal Hotel Forster owned by the Landlord ("15 June 2016 Lease"). The Tenant had been in occupation and operating out of the restaurant premises since late 2014 following the parties executing a heads of agreement.

The Tenant sought a declaration that the 15 June 2016 Lease was a binding lease. The Landlord sought a declaration that the Tenant was on a month-to-month lease.

The key issue is whether the parties reached a binding agreement for the lease of the restaurant premises on the terms of the 15 June 2016 Lease.

Background

In October 2014, Mr Darzi (Tenant) and Mr Koorey (Landlord) executed a pro forma heads of agreement (HOA) prepared by the Tenant in relation to the restaurant premises (Premises). The terms of the HOA were handwritten into the document.

The Tenant commenced paying rent in accordance with the HOA.

The solicitors for the Tenant requested a copy of the proposed lease (and various documentation) from the Landlord's solicitors in December 2014 but did not receive the lease until late May 2015. The Tenant's solicitors advised the Landlord's solicitors that the lease was not drafted in accordance with the HOA. Negotiations continued for the next few months.

So, was the HOA or the 15 June 2016 Lease binding?

In the Tenant's mind they were.

The Tenant submitted that in consideration of the communications and dealings between the parties leading to the draft lease and subsequent conduct supported a finding that the common intention of the parties was that they intended to be bound by the 15 June 2016 Lease due to:

  1. the written correspondence between the parties bound them and no further document was required, even though a lease, executed by both parties and exchanged in registerable form was contemplated by the parties; and
  2. the draft lease document executed and forwarded by the Tenant had been accepted by the Landlord as conduct that binds the parties.

In other words, the parties entered into and conducted themselves in accordance with a binding HOA. The Tenant's solicitor submitted that all the terms of the lease had been negotiated and there were no terms remaining to be agreed by at least May 2016 and that the Tenant accepted the lease terms demanded by the Landlord and by way of acceptance, executing and returned the 15 June 2016 Lease to the Landlord's solicitors.

It was also submitted that evidence of subsequent conduct supports a finding that the parties did not intend for the Landlord's execution to be a pre-condition to the formation of a binding lease agreement with evidence showing:

  • payment and acceptance of rent, including increase, referable to the lease document;
  • co-operation between the parties to apply for a liquor licence to remove the Landlord and replace with the Tenant;
  • the Tenant being ready, willing and able to perform other obligations including the payment of outgoings.

The Tenant also argued that references in correspondence from the Landlord's solicitors referring to the "Lessor" and to alleged "breaches of the terms of the lease between the parties" constitutes an admission that the Landlord was referring to the 15 June 2016 Lease.

The Tenant's solicitors cited two cases in particular:

Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353 at 360 (first class of case considered by the Court) – "one in which the parties have reached finality in arranging all the terms of their bargain and intended to be immediately bound to the performance of those terms but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect".

Wayne Edward John Streat v Fantastic Holdings Limited [2011] NSWSC 1097 – in this case the Court held that the parties were bound to the lease document prepared even though the lessor had not executed the lease.

As for the Landlord, he contended there was no intention to make a binding lease as the lease was not executed nor exchanged by the parties. The Landlord's arguments were based on:

  • the Tenant's threat of mediation to the Retail Tenancies Tribunal was an admission that he did not consider the HOA to be binding;
  • the negotiations were conducted through solicitors and on this basis there would be no formal, binding or legal lease unless and until a lease in registrable form was agreed, executed and exchanged in accordance with ordinary practice (Masters v Cameron (third class of case considered by the Court));
  • the requests for a formal lease was evidence of a common intention of the parties not to make a concluded bargain unless and until they both executed and exchanged a formal lease;
  • relying on the statement by Palmer J in Viva Plastic Pty Ltd v Stoermer [2006] NSWSC 948 at [23] that "the normal expectation of the parties is that documents evidencing the transaction will be prepared by solicitors, that the parties will receive advice of their solicitor as to the terms of their agreement embodied in the documents, and there will be no binding agreement between the parties until formal execution and exchange of counterparts of the documents".

Finding on the 15 June 2016 Lease

To determine whether a binding lease or agreement for a lease exists, the Court must ascertain the objective intention of the parties having regard to the language used by the parties, their conduct and the surrounding circumstances known to the parties. In commercial lease and conveyancing transactions, where the parties are acting through solicitors, there is a presumption that there will be no binding agreement until formal execution and exchange of counterparts of the documents takes place or there is "the completion of some ceremony which marks the stage at which a contract comes into existence" (Summit Properties Pty Ltd v Comserv (No784) Pty Ltd (1981) 2 BPR 7,903). However, that presumption can be displaced if there is evidence that the parties had a common intention that, despite normal expectation the agreement informally reached should be binding although its terms may later be amplified and embodied in a formal document via solicitors.

The Court's conclusion, after careful consideration of the facts and actions of the parties found no binding lease or HOA came into existence on the terms of the 15 June 2016 Lease. The correspondence which is said to give rise to a binding lease was between the solicitors for the parties and not the parties themselves. Solicitors have authority to negotiate the terms of a contract on behalf of their client however that authority does not extend to bind a client to a contract without clear and cogent evidence of such authority (how will this be affected by electronic registration of leases in NSW where a solicitor will be required to have their client's authority to enter into a lease?). The Court stated that while the payment and acceptance of rent in accordance with the lease document is a significant factor for the Tenant, the context in which those payments were made, coupled with the surrounding circumstances and conduct by both parties evinces an objective intention not to be bound before the execution and exchange of the forma lease document.

Was there a month-to-month tenancy?

The Landlord submitted that the Retail Leases Act 1994 (NSW) ("RLA") did not apply as the Tenant did not enter into a "retail shop lease" prior to or after taking possession of the premises and therefore was determinable on one month's notice. The Tenant contended that there was a lease caught by the RLA and therefore had a minimum term of five years.

The RLA does not require the parties to execute and exchange a formal lease document before or after entering into occupation and paying rent. Pursuant to s3 of the RLA, a retail shop lease may exist whether or not there is an agreement for lease in writing only that there is an agreement under which a person has been granted the right of occupation of a retail shop in exchange for value i.e. rent. Under s8 of the RLA, a lease commences when a person enters into possession of the retail shop as lessee under the lease or begins to pay rent as lessee.

Finding as to month-to-month tenancy

The Court noted the parties executed the HOA and then the Tenant entered into occupation of the Premises and commenced paying rent. The relevant times for assessing when a retail shop lease arose are the dates on which the Tenant took possession or started paying rent and accordingly, pursuant to s8 of the RLA, the Court found a retail shop lease was entered into. The Court formed the view that s127 of the Conveyancing Act 1919 (NSW) did not apply and that the Tenant had a 5 year lease which commenced on the date the Tenant took possession of the Premises.

The Tenant had argued that the lease should be in accordance with the HOA – a 5 year term + three 5 year options to renew. The Court only granted the Tenant the first 5 years. That 5 year lease expired in October 2019.

While neither party won the case, the Landlord was able to obtain vacant possession in October 2019.

What to take away from this case?

In this case, the conduct and common intention of the parties when negotiating the terms of the lease, especially via solicitors, was critical to establishing whether there was a binding agreement or not. Here, such conduct could not disturb the presumption that there would be no binding agreement until a formal lease was signed by both parties. This is another, in a confusing line of cases about binding agreements which may become more confused by the process of electronic registration in NSW and other States.

The lesson to be taken away is to try to be as clear as possible and do not enter possession and pay rent (or let a tenant do so) until the lease is signed.

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.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
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”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions