28/09/2015

A recent case from Western Australia highlights that exchanging emails during negotiations can lead to a binding enforceable agreement, even if all the terms have not been fully agreed to by both parties.

In May 2009, a landlord (through its agent) and tenant commenced negotiations via email in relation to drawing up the terms of a new lease over office premises, as the current lease was about to expire.

An extensive proposal was sent by the landlord’s agent to the tenant in June 2009, which contained proposed terms outlining the lease term, commencement date, net rental, rent review, outgoings, and use of the car parks, among other terms. The tenant replied by email to say that they were happy with the terms of the proposal and accordingly the landlord arranged for a lease to be prepared.

The lease was sent to the tenant in early July, however, the tenant delayed reviewing the document until September 2009, at which time they objected to the ‘excessive’ make-good clause which related to ‘making-good’ the premises at the conclusion of the lease. When the tenant sent back their own make-good clause for the landlord’s agent to consider, this was rejected and the lease was not formally executed by either party.

During this time, the original lease that the tenant had over the premises expired, however, the tenant continued to pay the rent. On 23 September 2009, the tenant sought to vacate the premises. The landlord argued that they could not vacate as they had previously accepted, and were now bound by, the concluded agreement to lease with the landlord. Subsequent email communications between all the parties culminated in court proceedings - Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd [2015].

The Appeal Court looked to at all the circumstances surrounding the negotiations and acceptance of the proposals, including the statements used by both parties in their emails, and upheld the decision in favour of the landlord that there was a binding agreement between the landlord and tenant.

In particular, the Court noted that at the time of negotiating the tenant was familiar with the suitability of the premises as they had been tenants for the six years prior to 2009; the essential terms of the lease had been agreed to; its sub-tenants had approved the terms of the proposal; and the subsequent negotiations of the non-essential terms and the failure to execute the formal lease documents did not negate the earlier binding agreement. Ultimately, the tenant was found to be bound by the new lease, even though they were unhappy with some of its terms and had never agreed to them.

This case serves as a stern warning to those who engage in lease or contract negotiations:

•    take extreme care with the language that you use so that you do not end up being bound by terms that you don’t agree with
•    clearly communicate to the other side, on each occasion during discussions, that the negotiations are not intended to be binding
•    state unequivocally early on during negotiations that no binding contract exists until the execution and exchange of a formal document.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.