Have You Actually Reached an Agreement?

At the beginning of any business, relationship parties will have discussions about what it is they are looking to achieve together – be it a sale, a joint venture or a lease.  While such discussions will usually start out in an informal manner it is not uncommon for them to progress to written exchanges prior to the entry into a more formal legal contract.  However, whether communications about the planned endeavour have been verbal or in writing, it will always be a matter for a Court to determine on the facts what the parties have actually agreed and whether any such agreement is legally binding. 

This issue was recently addressed by the Queensland Supreme Court in the case of Artesian Hospitality Pty Ltd v Tsuen Fung Holdings Pty Ltd .  The case involved negotiations between parties to a proposed lease in the Brunswick Street Mall in Fortitude Valley.  The owner of the property was represented by one of the sons of the family-owned business who engaged in communications with the controller of the proposed lessee entity.  Commencing with text exchanges, the parties subsequently had verbal discussions when they met at the premises prior to the proposed lessee’s legal representative forwarding a letter of offer to lease headed ‘Without Prejudice and Subject to Lessee Final Approval’, which included a provision clarifying that the information in the letter did not constitute a binding lease. After an exchange of drafts of a heads of agreement (Agreement) the proposed lessee amended the non-binding nature of the document to make it binding around the core terms of the proposed lease and a due diligence period on the basis that the proposed lessee was to spend considerable money and time to evaluate the tenancy and the bar/nightclub, it proposed to operate from the premises.  The final version of the Agreement clarified that any lease would be subject to the proposed lessee’s satisfaction with its due diligence inquiries and the parties using reasonable endeavours to finalise the lease on the basis of the terms of the Agreement within 30 days after such satisfaction was notified.  One of the core lease terms specified in the Agreement was a definition of the capital works that were to be undertaken and/or paid for by the property owner prior to commencement of the lease. The parties signed this version of the Agreement.

Subsequently, the parties disagreed as to what was to be included in the definition of capital works in the lease.  The property owner son agreed in a text message to the controller of the proposed lessee that such works would include the provision of a certificate of occupancy, after which the proposed lessee advised that due diligence was satisfied.  However, there continued to be disagreement about whether the capital works would also include the installation of a grease trap.  Amended drafts of the lease were exchanged between the parties’ legal representatives which contained inclusions (by the proposed lessee) and deletions (by the property owner) to this effect.  Shortly after the 30 day post-due-diligence period had passed, the property owner terminated the Agreement on the basis that the terms requested by the proposed lessee for the lease differed greatly from those originally agreed upon.

The first question for the Court to decide was whether there was a legally binding agreement.  Flanagan J applied the test of the intention of the parties objectively ascertained from the terms of the Agreement in determining that it was legally binding.  Beyond the specific wording to this effect and the fact that both parties had signed the Agreement in accordance with section 127 of the Corporations Act 2001 (Cth), the lease was made conditional upon the satisfaction of the proposed lessee within a 30-day due diligence period.  However, the Court found that the Agreement was to be distinguished from an agreement to lease in that the satisfaction of due diligence only imposed upon the parties an obligation to use reasonable endeavours to execute a lease on the basis of the terms of the Agreement.

His Honour then focused on the terms upon which the parties had actually agreed.  The continued attempts by the proposed lessee’s legal representative to have the installation of a grease trap included in the definition of capital works, and the deletion of such words by the legal representatives for the property owner, indicated that no agreement had ever been reached on this issue.  Under those circumstances, his Honour held that no agreement had been reached as to the terms of the lease within the requisite period and, therefore, under the terms of the legally binding Agreement the property owner had the right to terminate the Agreement once the 30-day period had expired.  It was because the Agreement contained this contractual right of termination that the Court could not grant the alternative relief sought by the proposed lessee, namely, specific performance of a lease on the terms contained in the Agreement plus the agreed obligation of the property owner to provide a certificate of occupancy as part of the capital works.

This case indicates the importance of how contractual terms are communicated between parties.  Whether terms are binding is an important consideration when commencing negotiations and will always be determined by an analysis of the circumstances surrounding pre-contractual discussions.  Critical to this case, however, was the drafting of the terms of the Agreement and the subsequent conduct of the parties in attempting to reach an agreement on final lease terms.  Parties to proposed contracts should be careful to ensure that any agreement intended to have legally binding effect be documented with as much detail as possible from as early as possible in the negotiation process.

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