Agreements to lease are frequently used in commercial leasing to bind parties to obligations for a future lease. In the recent case of Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd [2015] WASCA 21 (“Vantage v Priolo”) the parties engaged in preliminary negotiations and were found to have reached an immediately binding agreement to lease through email correspondence.
Agreements to Lease
Agreements to lease are used to outline the obligations of parties in a future lease prior to the final lease being executed or prepared. An agreement to lease must contain the essential elements of contract (offer, acceptance, consideration and intention) as well as outline the essential terms of an agreement to be binding.
Generally agreements to lease must be in writing and signed by the parties. However, this recent case did not consider this a requirement for a binding agreement to have been reached.
The Facts
Vantage (the tenant) and Priolo (the landlord) had begun negotiations for a new lease. Vantage was the present tenant and had leased the premises for six years.
Following email negotiations a revised proposal was sent to Vantage requesting that they confirm the terms were acceptable to them. Vantage returned correspondence accepting the terms of the proposal and requested that draft documents be prepared.
Vantage delayed the return of the draft lease and after some time raised issue with some of the terms of the lease, particularly the make good obligations. The parties continued to negotiate this point but never reached agreement.
Vantage later gave notice to Priolo purporting to terminate the current lease on the basis that they had been holding over the lease and no final agreement had been reached. Priolo disputed this notice, asserting that a binding agreement to lease had been formed.
Decision
The question before the court was whether the parties had intended to create a binding contract based on the revised proposal terms that would later be substituted by formal documents.
The court held that an immediately binding agreement to lease had been reached on the basis that the parties had intended to be bound because:
- Vantage had occupied the premises for a long time and was familiar with the suitability of the premises;
- the parties were familiar with each other as reliable and trustworthy;
- Vantage was not seeking another premises at any point in negotiations;
- the proposal was accepted, contained all essential terms and no new more onerous terms; and
- the new lease was for the same duration as the prior lease.
Even though negotiations remained ongoing, no agreement to the disputed terms was reached and no formal documentation was entered into, the court found that a binding agreement had been made.
This decision highlights the importance of making your intentions apparent at the outset and throughout negotiations of any agreement. It also highlights the importance of having formal documentation drawn by legal representatives, when you do wish to be bound by an agreement, to ensure that your interests are protected and that you are not bound to terms you do not necessarily agree with.
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