Harold R Finger & Co Pty Ltd v Karellas Investments Pty Ltd [2016] NSWCA 123
Here, the Court of Appeal held that the heads of agreement were binding, but were best characterised as an agreement to negotiate in good faith which bound the parties to enter into a formal agreement for lease and lease on the terms set out in the letter of offer if and only if agreement was finally reached.
Harold R Finger & Co Pty Ltd v Karellas Investments Pty Ltd [2016] NSWCA 123 involved a claim for damages made by Finger for the alleged breach by Karellas of certain “heads of agreement” to enter into an agreement for lease, and a lease, of a warehouse owned by Finger in Newtown. The site was to be redeveloped and fitted out as a supermarket, according to Karellas’ specifications. The so-called “heads of agreement” had come into existence by a letter in December 2009, in which Karellas made what was expressed as a “binding offer to enter into an agreement for lease and lease” of the premises in Newtown (the “letter of offer”). The letter of offer was signed and accepted by Finger in January 2010. Although the heads of agreement set out the rent, term, commencement and main commercial terms of the proposed lease, there were a number of terms that were required to be included in the proposed lease which remained for negotiation between the parties. This was contemplated by the heads of agreement, which provided Karellas with an express right to “terminate” and “withdraw from the project” if formal documentation was not executed within 12 months.
Months of negotiations followed, in which substantial changes to the original terms of the heads of agreement were “provisionally agreed”. However, when formal documents were being prepared for execution, Karellas’ solicitors informed Finger in a letter dated 9 June 2010 that “my client will not be proceeding with the above proposed lease on the current proposed terms”. The letter cited recent adverse business developments that had made the project unviable for Karellas. Crucially, the letter also said that “my client is willing to continue negotiations to see if a suitable outcome could be achieved for both parties”.
Finger took the solicitor’s letter as a repudiation of the heads of agreement, and refused to renegotiate the “provisionally agreed” terms any further. Finger notified Karellas that it had elected to accept the repudiation, terminate the agreement, and claim damages for breach of the agreement.
Karellas argued in reply that the heads of agreement were merely an unenforceable agreement to agree; but if there was a binding agreement, Karellas had not breached it.
Paul Carroll, Partner