Informal Dealings

Beware of Informal Dealings

Are you about to negotiate the renewal of a commercial lease? If yes, you’d better take a second to read this – you may be unknowingly locking yourself into legally binding commitments, even if you haven’t signed any documents.

But I Haven’t Signed Anything!

A recent Western Australian Court of Appeal decision recently found that an exchange of e-mails (informal dealings) between the landlord and tenant was enough to bind the parties.

The basic facts in this case were:

  • The tenant had leased the premises since 2003 and the premises were purchased by the landlord in 2007;

  • The lease was due to expire on 30 June 2009;

  • In May 2009, the landlord’s leasing agent e-mailed the tenant with a proposal for a new lease;

  • This proposal contained all the legal elements of a lease but was rejected by the tenant;

  • Shortly afterwards, the agent again e-mailed the tenant with a revised proposal;

  • The tenant e-mailed the agent stating that they were “happy with the terms of the proposal” and asked the agent to “wrap this up”.

  • Prior to signing the lease, the tenant discovered two clauses which it had previously overlooked and wanted taken out of the lease.

  • The landlord refused, stating that the e-mail exchange effectively amounted to a legally binding “agreement to lease”.

In this case, the court considered the following questions:

  • is there a clear intention from both parties to be contractually bound by their negotiations?

  • what are the parties agreeing to (i.e. lease, license agreement, etc)?

  • have the parties had previous or ongoing dealings with each other?

  • what was the purpose of the informal dealings and communications between the parties?

In the end, the WA Court of Appeal ruled in favour of the landlord.

The lesson to take home is, always make it clear during negotiations that you do not intend to legally bound by the negotiated terms and conditions until the contract/agreement/lease has been formally executed.

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