Lease negotiations – when am I bound?

By |2022-06-29T11:20:29+10:0021-9-21|

We are often asked by both landlords and tenants, whether or not a party is bound when negotiating a proposed lease.

A decision handed down by the Supreme Court of QLD on 30 August 2021 looked at this very issue – Ultra Tune Properties (QLD) No 2 P/L v DNR1 P/L atf Dalton Family Trust. The facts and circumstances are not uncommon in leasing (non-residential).

The background summary was that:

  • Ultra Tune had for some years leased a premise at Spencer Road, Nerang that was owned by DNR1
  • That lease expired on 30 September 2016
  • Ultra Tune remained as a tenant after that date, on a month-to-month basis – i.e. either the tenant or the landlord could terminate on giving one-month notice to the other
  • During the time that Ultra Tune was a tenant, they licensed their rights to occupy the premises to a franchisee of their business – in line with their franchise structure
  • Some time later in October 2019, representatives of Ultra Tune and its associated entities reached out and spoke to DNR1 about formalising a lease for a longer fixed term
  • After a handful of communications, DNR1 sent Ultra Tune a draft lease with a letter in February 2020, which was in a new and different form to the existing lease, stating to the effect:

“The submission of the lease is not intended to bind DNR1, but simply be the basis for lease negotiations to proceed, and DNR1 will not be bound until it signs a lease containing suitable terms.”

  • The letter also set out a few issues that needed to be addressed, such as arrears of rent and workshop floor repairs. All of those were essentially agreed to in principle, in correspondence sent by Ultra Tune in late May. The parties then engaged in negotiation of the actual terms of the draft lease that DNR1 had issued in February 2020. Of key importance, DNR1 restated that it did not intend to be bound until it had signed a final lease on terms suitable to it. The negotiations then proceeded on a number of points still in contention.
  • On 10 September 2020, there were communications from DNR1 to Ultra Tune concerning the actual provisions of the lease that were still not agreed. DNR1 in separate communications to the Ultra Tune licensee reiterated that until there was a final executed lease, the licensee could not show it to a prospective buyer of the licensee’s business – as the licensee was urging to do.
  • On 1 October 2020, Ultra Tune wrote to DNR1 advising that they accepted DNR1’s position on the remaining points. They then signed and sent the lease to DNR1.

Man in Black Jacket and Black Knit Cap Standing Near Vehicle

Ultra Tune claimed that an enforceable lease was in place, but DNR1 rejected that. The matter proceeded to a Supreme Court trial.

On the question of whether a contract had been formed, the court looked at the case law around whether the parties had by their conduct (express or implied) completely agreed on all terms, with just the formality of actually entering into a formal agreement to occur. That requires an objective test of the situation – i.e. what would a reasonable person think the parties intentions were.

Ultimately, the court ruled that despite the fact that DNR1 had delivered a detailed new lease and engaged in negotiations with Ultra Tune about a relatively small number of terms that were not agreed, the repeated express statements that DNR1 would not be bound until such time as a final lease in agreed form was signed by DNR1, was unequivocal evidence of its intention to NOT be bound until that had occurred.

Ultra Tune failed in their primary argument against DNR1 because DNR1 had used suitable words to protect itself from being bound to an agreement, until such time as it was in a satisfactory form and signed.

In reality, we often see those words “the parties do not intend to be bound until a lease in final form is signed” or similar, in Offers to Lease or other preliminary lease proposals which go by many different names, eg Agreement to Lease, Lease Proposal, Terms Sheet to name a few. Be aware that these words alone may not stand up where the conduct of the parties then show an intent to depart from that position.

Before embarking on a proposal to lease premises – whether it’s taking a lease or granting it – make sure that you have a clear picture of what your priorities are. At the outset, it’s likely for the parties to want to ‘not be bound’ but there will be a stage when that is the desired position.

Don’t make assumptions about whether you’re bound. If you’re not sure, give me a call.

Nicholas can be contacted at njp@nicholsons.com.au or call (07) 3226 3927.

Think Leasing. Think Nicholsons.

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