Sign on the dotted line
Commercial leasing transactions often occur in 2 stages:
- Stage 1: preparation of lease offer.
- Stage 2: formalisation of lease document.
The time between initial agreement (Stage 1) and binding agreement (Stage 2) is the ‘risk period’. The parties may change their minds and pull out from the deal, leaving the innocent party to try and enforce the lease offer.
It’s a deal! Or is it?
In Activ Foundation Incorporated v WBHO-Carr Pty Ltd, the tenant found out the hard way that its lease offer to lease was legally binding. It was ordered to pay $657,470.85 for breaching an agreement to lease office space even though:
- no formal lease agreement was executed; and
- the tenant had not occupied the office space.
In this case:
- The tenant signed an offer to lease the premises on 21 April 2011, was accepted by the landlord that day.
- The lease offer was subject to the tenant’s board’s approval on 9 May 2011. This was obtained and communicated to the landlord on 20 May 2011.
- After being provided with the formal lease for execution, the tenant pulled out by notifying the landlord’s agents on 8 June 2011.
In reaching its decision, the court considered the following:
- Structure and content: where the clauses are expressed formally, it suggests that parties intend to be legally bound.
- Details: where the lease offer is extensively detailed, it suggests an intend to be legally bound. In this case, the lease offer was a 20-clause document that the court determined ‘went beyond specifying bare essentials of a lease’.
- Language: In this case, the lease offer did not specify that the offer was subject to the parties signing a formal lease, indicating the parties were prepared to proceed with the lease on the basis of the lease offer.
The tenant was ordered to pay the landlord damages to place the landlord in the same position as if the contract had been performed as follows:
||Loss of rent
||$48,671.09 (which would have been payable by the tenant)
||Car park licence fees
||Cost of lease preparation
||Construction of corridor
||$26,076 (necessary to accommodate a new tenant)
||Fit out costs
||$95,303.84 (necessary to accommodate a new tenant)
These rights are reserved
In determining whether a binding contract exists, courts:
- look at the surrounding circumstances of the negotiations; and
- make an objective assessment of the state of affairs between the parties before, at the time of, and after the entry into the disputed agreement.
The case is a valuable reminder that, unless the parties intend otherwise, any offers to lease should be expressly stated to be non-binding until formal documentation has been signed. Rights to make changes to draft documents should be expressly reserved.
 Activ Foundation Incorporated v WBHO-Carr Pty Ltd  WADC 174.
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Posted on: 11 May 2018