Commercial leasing transactions often occur in 2 stages:
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.
In Activ Foundation Incorporated v WBHO-Carr Pty Ltd[1], 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:
In this case:
In reaching its decision, the court considered the following:
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:
1 | Loss of rent | $421,732.45 |
2 | Outgoings | $48,671.09 (which would have been payable by the tenant) |
3 | Car park licence fees | $57,148 |
4 | Cost of lease preparation | $1,518.08 |
5 | Marketing costs | $7,021.39 |
6 | Construction of corridor | $26,076 (necessary to accommodate a new tenant) |
7 | Fit out costs | $95,303.84 (necessary to accommodate a new tenant) |
In determining whether a binding contract exists, courts:
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.
[1] Activ Foundation Incorporated v WBHO-Carr Pty Ltd [2014] WADC 174.
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Posted on: 11 May 2018