Beware: Informal lease negotiations can create binding agreements!
A lease is a legally binding contract that gives you certain rights to a property for a set term.
A written commercial lease is used when leasing property used primarily for a business.
You should never sign a lease without understanding all of its terms and conditions.
If you don't understand what you are agreeing to you can be exposed to serious financial and legal problems.
Before entering into a lease it is usual for a period of negotiation to take place between the landlord and the tenant and it is important to understand the relationship being entered into and the rights and obligations created in the lease document.
It is also important that the negotiations are conducted so that the commercial terms are agreed before a binding agreement is created, as it is possible to be locked into a commercial lease without signing any paperwork if the right precautions are not taken.
There are numerous cases that illustrate the dangers that exist in which a Court has found that pre-contractual negotiations conducted by way of email were binding even where no formal contract had been signed.
One lesson for parties is to beware of emails when negotiating commercial leases, and to use them carefully.
Another is for a prospective tenant not to sign ‘standard forms’ or ‘offers to lease’ agreeing to enter into a lease on the landlord’s standard terms, without first being very sure of what those terms are. Such forms also often contain provisions whereby the tenant agrees to pay the landlord’s legal costs.
In the Western Australian Court of Appeal case of Vantage Systems Pty Ltd v Priolo Corporations Pty Ltd, the Court considered whether preliminary agreements between a landlord and tenant were binding, despite the fact that formal documents had not yet been executed.
In that case, the tenant leased commercial premises from the landlord. Before the expiration of the lease, the parties’ representatives entered into negotiations for a new lease. The landlord emailed the tenant a proposal for a new lease and amendments were negotiated by email. The tenant asked the landlord to prepare lease documents even though some minor terms were not agreed. Ultimately, the tenant did not sign the lease documents and sought to terminate its tenancy.
The Court of Appeal found that the parties had agreed to be bound immediately by an agreement to lease when the tenant accepted the landlord’s proposal for the new lease. The Court was not dissuaded by the fact that certain clauses in the lease remained in contention or that no formal lease was ever signed.
The decision highlights the fact that a Court will not necessarily find that a binding contract is not made until it has been formally executed.
How can you avoid this result?
To avoid being bound by email exchanges when negotiating the terms of a contract:
- clearly communicate that no binding agreement is made until a formal agreement is entered into and executed;
- repeat this message in every communication with the other party; and
- using phrases such as “subject to contract” will not be sufficient.
Also, do not:
- agree to terms of a contract in correspondence unless you are prepared to be bound by them; or
- ignore emails from the other party which do not reflect the agreement you think you have, or which set out any terms to which you would not be willing to agree .
It is crucial that parties manage the risk of being bound by email negotiations by using emails with care and stating in every email that no binding agreement is made until a formal contract is executed.
If you or someone you know wants more information or needs help or advice, please contact us on (07) 5443 4866 or email email@example.com.