Can a lease become binding before both parties sign it?

In commercial lease transactions a lessee will usually, before taking possession of the premises, sign and return the lease to the lessor who then countersigns, registers (if necessary) and returns the signed and registered lease to the lessee. Because of this, it can sometimes be difficult to ascertain when a lease becomes binding, as demonstrated by the following recent decisions.

Case study lessee fails to establish a binding lease

In the recent case of Darzi Group Pty Ltd v Nolde Pty Ltd [2019] NSWSC 335, the lessee had failed to establish that a binding lease had come into effect after signing and returning it to the lessor. The parties had signed a heads of agreement, the lessee took possession of the premises and started to fit out of the premises before a formal lease had been signed. The lessee was expecting the formal lease to reflect the heads of agreement, however the terms of the lease provided by the lessor varied substantially.

As a result, the parties negotiated the lease terms through their solicitors for 2 years, which resulted in the lessee executing the lease and returning it to the lessor. However, despite the passing of another 2 years, the lessor never signed the lease and attempted to renegotiate the terms. The lessee then commenced legal proceedings to enforce the lease it had signed. The Court found in favour of the lessor and held that the parties did not intend to be bound by the lease as it was reasonable to presume that where parties are acting through legal advice, no binding agreement arises until formal execution and exchange.

Case study contrast Court finds lease to be binding

However, this is to be contrasted with another recent case of Realm Resources Ltd v Aurora Place Investments Pty Ltd [2019] NSWSC 379, where a dispute arose as to whether the sublessee was bound after signing and returning the sublease to the sublessor. After returning the sublease, the sublessee attempted to withdraw from the transaction, before the sublessor’s countersignature. The sublessee then commenced proceedings, contending that the sublease was not intended to be binding before both parties had signed and that it had been validly withdrawn. The Court found in favour of the sublessor and held that:

• the sublease was intended to take effect as a deed as evidenced by a clause in the sublease which stated that it was “a deed, even if it is not registered”;
• the sublessee had properly executed the deed in accordance with section 127 of the Corporations Act 2001 (Cth);
• the sublessee delivered the deed with the intention to be bound immediately, subject only to the sublessor’s execution, and once the deed is delivered it cannot be withdrawn.

The above cases illustrate that when it comes to ascertaining when a lease is binding, the court will consider the conduct between both parties in detail. Where parties do not wish to be bound by the terms of an agreement until such agreement has been executed and exchanged, this should be expressly stated.

If you have any questions about drafting and negotiating your commercial lease or need assistance in ascertaining whether a binding lease is in place, please contact our Property and Commercial Litigation Teams and we will be happy to assist.

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