It is increasingly popular for commercial parties to enter into a heads of agreement, offer to lease, agreement to lease, memorandum of understanding or similar type document before entering into a formalised lease.
A question which is often overlooked at the time of entering into such documents is whether the parties intended to be bound by the terms of the document.
This is a serious consideration and of significant practical consequence, especially if one of the parties decides not to proceed with the lease, after the prior agreement has been entered into.
If is it determined by a Court that the parties intended to be legally bound by the prior agreement and that it was to be an enforceable contract at law, the other contracting party may enforce the prior agreement via the equitable remedy of specific performance thereby requiring the breaching party to perform under the lease.
Even in circumstances where the prior agreement specifically says the parties do not intend for the prior agreement to be legally binding, if all the necessary elements of a contract are there, including an intention to be bound, a court may find the prior agreement to be legally binding and enforceable by a party.
The Court will assess the intention to enter into an immediately binding contract on an objective basis looking at what each party by their words and conduct would lead a reasonable person in the position of the other party to believe. This involves looking at:
- whether there is agreement on the essential terms (not all the terms);
- what the parties do and say after the agreement has been made;
- use of the words “offer” and “acceptance;” and
- referring to the agreement in the present tense instead of the future tense.
If you do not want your negotiations to be binding before you sign a formal agreement, make it clear from the outset that pre-contractual arrangements are not binding unless and until a formal agreement is entered into, and repeat this message in every communication with the other party.
Unless the parties intend otherwise, any written offers to lease should be expressly stated to be non-binding until formal lease documentation has been signed. Rights to make changes to draft documents should be expressly reserved to avoid dispute about that later in time.
As a general rule, do not sign a preliminary agreement without first seeking proper legal advice or unconditionally agree to terms and conditions in correspondence unless you are prepared to be bound by them.
If you are considering signing a document in such circumstances and are uncertain about its legal effect, please seek advice from one of our commercial lawyers at your Gold Coast lawyers, McLaughlins Lawyers.
Author: Matt Kollrepp
Director: Ian Kennedy