Beware: Informal lease negotiations can create binding agreements

An email can be enough to lock you into an agreeement – even without a formal contract being signed.

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 its terms and conditions. If you do not understand what you are agreeing to you could experience serious financial and legal problems.

Pre-contract negotiations

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 a number of cases that illustrate the dangers that exist and where a Court has found that pre-contractual negotiations conducted by way of email were binding even where no formal contract had been signed.

The lesson for parties is to beware of emails when negotiating commercial leases and to use them carefully.

Case study

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 nor that no formal lease was ever signed.

The decision shows 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 what you would be willing to agree to.

Conclusion

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 03 9592 3356 or email office@citypacific.com.au or fill in our contact form.