Is there a binding lease or agreement for lease?
Darzi Group Pty Ltd v Nolde Pty Ltd  NSWSC 335
The parties entered into negotiations for a retail lease based on terms of a lease executed by the Tenant and submitted to the solicitors of the Landlord with respect to a restaurant premises located in Dorsal Hotel Forster owned by the Landlord (“15 June 2016 Lease”). The Tenant had been in occupation and operating out of the restaurant premises since late 2014 following the parties executing a heads of agreement.
The Tenant sought a declaration that the 15 June 2016 Lease was a binding lease. The Landlord sought a declaration that the Tenant was on a month-to-month lease.
The key issue is whether the parties reached a binding agreement for the lease of the restaurant premises on the terms of the 15 June 2016 Lease.
In October 2014, Mr Darzi (Tenant) and Mr Koorey (Landlord) executed a pro forma heads of agreement (HOA) prepared by the Tenant in relation to the restaurant premises (Premises). The terms of the HOA were handwritten into the document.
The Tenant commenced paying rent in accordance with the HOA.
The solicitors for the Tenant requested a copy of the proposed lease (and various documentation) from the Landlord’s solicitors in December 2014 but did not receive the lease until late May 2015. The Tenant’s solicitors advised the Landlord’s solicitors that the lease was not drafted in accordance with the HOA. Negotiations continued for the next few months.
So, was the HOA or the 15 June 2016 Lease binding?
In the Tenant’s mind they were.
The Tenant submitted that in consideration of the communications and dealings between the parties leading to the draft lease and subsequent conduct supported a finding that the common intention of the parties was that they intended to be bound by the 15 June 2016 Lease due to:
- the written correspondence between the parties bound them and no further document was required, even though a lease, executed by both parties and exchanged in registerable form was contemplated by the parties; and
- the draft lease document executed and forwarded by the Tenant had been accepted by the Landlord as conduct that binds the parties.
In other words, the parties entered into and conducted themselves in accordance with a binding HOA. The Tenant’s solicitor submitted that all the terms of the lease had been negotiated and there were no terms remaining to be agreed by at least May 2016 and that the Tenant accepted the lease terms demanded by the Landlord and by way of acceptance, executing and returned the 15 June 2016 Lease to the Landlord’s solicitors.
It was also submitted that evidence of subsequent conduct supports a finding that the parties did not intend for the Landlord’s execution to be a pre-condition to the formation of a binding lease agreement with evidence showing:
- payment and acceptance of rent, including increase, referable to the lease document;
- co-operation between the parties to apply for a liquor licence to remove the Landlord and replace with the Tenant;
- the Tenant being ready, willing and able to perform other obligations including the payment of outgoings.
The Tenant also argued that references in correspondence from the Landlord’s solicitors referring to the “Lessor” and to alleged “breaches of the terms of the lease between the parties” constitutes an admission that the Landlord was referring to the 15 June 2016 Lease.
The Tenant’s solicitors cited two cases in particular:
Masters v Cameron  HCA 72; (1954) 91 CLR 353 at 360 (first class of case considered by the Court) – “one in which the parties have reached finality in arranging all the terms of their bargain and intended to be immediately bound to the performance of those terms but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect”.
Wayne Edward John Streat v Fantastic Holdings Limited  NSWSC 1097 – in this case the Court held that the parties were bound to the lease document prepared even though the lessor had not executed the lease.
As for the Landlord, he contended there was no intention to make a binding lease as the lease was not executed nor exchanged by the parties. The Landlord’s arguments were based on:
- the Tenant’s threat of mediation to the Retail Tenancies Tribunal was an admission that he did not consider the HOA to be binding;
- the negotiations were conducted through solicitors and on this basis there would be no formal, binding or legal lease unless and until a lease in registrable form was agreed, executed and exchanged in accordance with ordinary practice (Masters v Cameron (third class of case considered by the Court));
- the requests for a formal lease was evidence of a common intention of the parties not to make a concluded bargain unless and until they both executed and exchanged a formal lease;
- relying on the statement by Palmer J in Viva Plastic Pty Ltd v Stoermer  NSWSC 948 at  that “the normal expectation of the parties is that documents evidencing the transaction will be prepared by solicitors, that the parties will receive advice of their solicitor as to the terms of their agreement embodied in the documents, and there will be no binding agreement between the parties until formal execution and exchange of counterparts of the documents”.
Finding on the 15 June 2016 Lease
To determine whether a binding lease or agreement for a lease exists, the Court must ascertain the objective intention of the parties having regard to the language used by the parties, their conduct and the surrounding circumstances known to the parties. In commercial lease and conveyancing transactions, where the parties are acting through solicitors, there is a presumption that there will be no binding agreement until formal execution and exchange of counterparts of the documents takes place or there is “the completion of some ceremony which marks the stage at which a contract comes into existence” (Summit Properties Pty Ltd v Comserv (No784) Pty Ltd (1981) 2 BPR 7,903). However, that presumption can be displaced if there is evidence that the parties had a common intention that, despite normal expectation the agreement informally reached should be binding although its terms may later be amplified and embodied in a formal document via solicitors.
The Court’s conclusion, after careful consideration of the facts and actions of the parties found no binding lease or HOA came into existence on the terms of the 15 June 2016 Lease. The correspondence which is said to give rise to a binding lease was between the solicitors for the parties and not the parties themselves. Solicitors have authority to negotiate the terms of a contract on behalf of their client however that authority does not extend to bind a client to a contract without clear and cogent evidence of such authority (how will this be affected by electronic registration of leases in NSW where a solicitor will be required to have their client’s authority to enter into a lease?). The Court stated that while the payment and acceptance of rent in accordance with the lease document is a significant factor for the Tenant, the context in which those payments were made, coupled with the surrounding circumstances and conduct by both parties evinces an objective intention not to be bound before the execution and exchange of the forma lease document.
Was there a month-to-month tenancy?
The Landlord submitted that the Retail Leases Act 1994 (NSW) (“RLA”) did not apply as the Tenant did not enter into a “retail shop lease” prior to or after taking possession of the premises and therefore was determinable on one month’s notice. The Tenant contended that there was a lease caught by the RLA and therefore had a minimum term of five years.
The RLA does not require the parties to execute and exchange a formal lease document before or after entering into occupation and paying rent. Pursuant to s3 of the RLA, a retail shop lease may exist whether or not there is an agreement for lease in writing only that there is an agreement under which a person has been granted the right of occupation of a retail shop in exchange for value i.e. rent. Under s8 of the RLA, a lease commences when a person enters into possession of the retail shop as lessee under the lease or begins to pay rent as lessee.
Finding as to month-to-month tenancy
The Court noted the parties executed the HOA and then the Tenant entered into occupation of the Premises and commenced paying rent. The relevant times for assessing when a retail shop lease arose are the dates on which the Tenant took possession or started paying rent and accordingly, pursuant to s8 of the RLA, the Court found a retail shop lease was entered into. The Court formed the view that s127 of the Conveyancing Act 1919 (NSW) did not apply and that the Tenant had a 5 year lease which commenced on the date the Tenant took possession of the Premises.
The Tenant had argued that the lease should be in accordance with the HOA – a 5 year term + three 5 year options to renew. The Court only granted the Tenant the first 5 years. That 5 year lease expired in October 2019.
While neither party won the case, the Landlord was able to obtain vacant possession in October 2019.
What to take away from this case?
In this case, the conduct and common intention of the parties when negotiating the terms of the lease, especially via solicitors, was critical to establishing whether there was a binding agreement or not. Here, such conduct could not disturb the presumption that there would be no binding agreement until a formal lease was signed by both parties. This is another, in a confusing line of cases about binding agreements which may become more confused by the process of electronic registration in NSW and other States.
The lesson to be taken away is to try to be as clear as possible and do not enter possession and pay rent (or let a tenant do so) until the lease is signed.