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The signing and delivery of a lease by a tenant together with specific performance may not be sufficient to give rise to a binding lease commitment – Landlord & Tenant – Leases



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The NSW Supreme Court’s decision in Thorn Australia Pty
Ltd v Centuria Property Funds Ltd
[2021] NSWSC 1217
(Thorn) demonstrates the challenges associated
with enforcing a lease where it has not been fully executed and
properly exchanged. In this context, the words and conduct of both
the executing party and the party receiving delivery of any
executed counterpart, together with the circumstances surrounding
the execution of the lease by any one party, must be evaluated to
objectively determine whether the executing party intended to be
bound immediately.

Background

In Thorn, the plaintiff was Thorn Australia Pty Ltd (an intended
tenant of certain commercial premises in Eveleigh NSW) and the
defendants were Centuria Property Funds Ltd and The Trust Company
(Australia) Limited (comprising the registered proprietor of the
commercial premises the subject of the dispute).

The plaintiff sought declaratory relief to the effect that it
had not entered into a binding lease or agreement for lease in
respect of certain commercial premises in Eveleigh NSW. By their
Cross-Summons, the defendants sought declaratory relief to the
effect that a binding lease or agreement for lease had come into
existence between the parties. The question for consideration in
Thorn primarily centred around whether the plaintiff delivered the
lease documents (comprising a lease and incentive deed to be
executed by deed) to the defendants so as to become bound by them
such that the lease documents could not be recalled.

By way of background facts, the parties entered into a Heads of
Agreement (HOA) which provided that the HOA did
not constitute a binding lease and that either party could withdraw
from and terminate the negotiations at any time prior to execution
of any formal lease documents. Requirements of this nature are
standard in most term sheets involving leasing transactions.

Subsequent to the execution of the HOA by the plaintiff and
defendants, and shortly after agreement had been reached between
the parties with respect to the form and substance of the formal
lease documents, the plaintiff (in chronological order from
earliest to latest in time):

  1. paid to the defendants a deposit of $25,000;

  2. duly signed and delivered (by post and email) to the
    defendants’ solicitor the formal lease documents;

  3. provided to the defendants a certificate of currency in respect
    of the plaintiff’s insurance pursuant to the lease;

  4. paid to the defendant’s solicitor $201.40 on account of the
    lease registration fee and lodgement fee;

  5. was granted early access to the premises for works relating to
    internet technology services; and

  6. delivered to the defendants a bank guarantee.

In providing the lease documents to the defendants’
solicitor, the plaintiff’s solicitor advised that the
defendants were not authorised to exchange the lease documents
until such time as the plaintiff’s solicitor had given its
written authorisation to do so.

The defendants experienced delays in executing the lease
documents on account of COVID-19. The plaintiff withdraw from
negotiations prior to the defendants execution and delivery of the
lease documents to the plaintiff. The defendants contended that the
plaintiff was bound by the lease documents upon their signing and
delivery to the defendant’s solicitor.

Question and Consideration

The Court considered whether the plaintiff evinced an intention
to be immediately bound by the formal lease documents which
involved an analysis of the words and conduct of the plaintiff and
the circumstances surrounding the execution and delivery of the
lease documents to the defendants solicitor. Intention in this
context is a question of fact. In considering that question the
Court considered it permissible and necessary to take into account
later events, as well as circumstances prior to or contemporaneous
with the alleged delivery of the lease documents to ascertain the
intention of plaintiff at the time of execution.

If the relevant intention was found to exist, delivery of the
formal lease documents would be taken to have been effected and the
plaintiff would be bound by the lease documents.1 If the
relevant intention was not found to exist, the plaintiff would be
free to withdraw from and terminate the negotiations.

Findings and Discussion

The Court found that there was insufficient evidence to
demonstrate an intention of the plaintiff to be immediately bound
by the formal lease documents.

The Court had regard to the communications sent by the
plaintiff’s solicitor to the defendants’ solicitor –
of particular importance, the plaintiff’s solicitor had made it
clear that an exchange of the formal lease documents would not take
place until a written authorisation was given by the
plaintiff’s solicitor. This particular exchange protocol was
addressed in the plaintiff’s solicitor’s letter of 30 June
2021 to the defendants’ solicitor which enclosed the
plaintiff’s signed versions of the lease documents.
Specifically, the plaintiff’s solicitor advised the
defendants’ solicitor that the defendants’ solicitor must
first provide to the plaintiff’s solicitor the defendants
signed versions of the lease documents for the plaintiff’s
solicitor to review and authenticate before the plaintiff’s
solicitor would provide its authorisation to give effect to the
exchange of the lease documents. In addition, the letter also
required the defendants not to complete the exchange of the
incentive deed (which was held by the Court to be the first
document which would be capable of giving effect to a binding
commitment before the lease based on its contents and other
ancillary communications) until the plaintiff’s solicitor had
given its written authorisation to do so. The Court presumed that
the letter of 30 June 2021 was written in accordance with
instructions given by the plaintiff and could be taken into account
as bearing upon the plaintiff’s intention at or around the time
the lease documents were signed and sent to the defendants.

The Court also had regard to the fact that the plaintiff’s
solicitor had provided to the defendant’s solicitor soft copies
of the signed lease documents on 29 June 2021 and considered
whether this gave rise to an intention of the plaintiff to be
immediately bound by them. The Court found that the provision of
the signed soft copies would not, when considered in the light of
the HOA (and the right to withdraw contained in the HOA) and the
earlier communications between the parties, be reasonably
understood as evidencing an intention to be immediately bound by
them.

The Court found that the procedure envisaged by a Document
Return Checklist provided by the defendants (which contained a set
of procedures for lease certification, execution, delivery and
registration) was not necessarily inconsistent with the existence
of a right to withdraw until formal lease documents had been
executed by the parties as contemplated by the HOA. In
circumstances where the right to withdraw (as enshrined in the HOA)
had not been abrogated or abandoned, it remained the position that
the parties had reserved to themselves the right to withdraw until
such time as formal lease documents were executed by both
sides.

In communications between the solicitors acting for the
plaintiff and defendants on 2 July 2021 and 5 July 2021, the
defendants’ solicitor notified the plaintiff’s solicitor
that the plaintiff had only signed one incentive deed and that the
defendants required the plaintiff to provide a further signed
incentive deed. In their communications, the plaintiff’s
solicitor and the defendants’ solicitor implicitly agreed to an
execution protocol which required, first, the plaintiff’s
solicitor to provide plaintiff signed lease documents to the
defendants’ solicitor, secondly, the defendants to sign
duplicates of the lease documents, thirdly, the defendant’s
solicitor to attend to the registration of the lease and, finally,
the defendants’ solicitor to provide to the plaintiff’s
solicitor copies of the fully signed lease documents. The Court
found that this execution protocol envisioned no exchange of
counterparts signed by one party; rather the lease documents would
be signed first by the plaintiff, and then by the defendants. In
addition to this finding, the Court also found that by giving the
defendant the second signed incentive deed, the plaintiff was
facilitating the execution protocol proposed by the defendant and
that the plaintiff was merely complying with a procedural step in
progressing the matter. The Court found that the execution protocol
proposed by the defendants’ solicitor, and implicitly accepted
by the plaintiff’s solicitor, was not inconsistent with the
existence of a right to withdraw from the transaction.

The payment of the lease registration fee and the sending of the
bank guarantee did not alter this conclusion – the Court held
that such conduct evidenced a desire on the part of the plaintiff
to have the transaction proceed but they were not inconsistent with
maintaining a right to withdraw prior to the defendants committing
to the transaction by signing the lease documents themselves. The
Court also came to a similar conclusion with respect to requests
for access and held that this was a further indication of the
plaintiff’s desire to have the transaction proceed.

The creation of any legal rights was the province of the
dealings involving the solicitors and the plaintiff’s solicitor
was consistent with preserving the right to withdraw from the
transaction – as the defendants had not signed the lease
documents by the time the plaintiff’s solicitor communicated
the plaintiff’s withdrawal, it followed that the plaintiff was
entitled to withdraw from the transaction.

Conclusion

Thorn highlights the importance of agreeing exchange protocols
and the processes which will need to be complied with before lease
documents becoming binding upon the parties.

In circumstances where a party requires the ability to withdraw,
it will be integral to establish (and preserve without producing
conflicting communications or engaging in conduct which evidences
an intention to be bound) a right to withdraw which may be premised
in a term sheet / heads of agreement and subsequently resonated in
future communications.

There may be circumstances where a party may wish to proceed on
more uncertain terms in an attempt to give rise to immediately
binding rights in circumstances where there is a clear agreement on
the form and substance of documents (without formal execution)
which is supported by conduct manifesting an objective intention to
be immediately bound. This will obviously be dependent upon the
parties personal circumstances and market conditions.

Conduct and communications are critical to any analysis of
intention. For that reason, specific performance at any level
should be avoided until exchange has been properly concluded to
avoid giving effect to immediately binding rights and obligations
or an estoppel.

Footnote

1 Realm Resources Ltd v Aurora Place
Investments Pty Ltd
[2019] NSWSC 379

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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