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DEAL OR NO DEAL: WHEN LEASE NEGOTIATIONS BECOME BINDING
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There is often a lot of negotiation that takes place between prospective landlords and tenants before formal documentation (such as an agreement to lease) is signed. Whether those negotiations culminate in a binding commitment before an agreement is signed can be a vexed issue.

It was of utmost importance to a prospective cinema tenant in a recent High Court case, particularly given they were pipped at the post by a rival cinema operator. Reading Entertainment Australia Pty Ltd v AMP Capital Shopping Centres Pty [1] is an illustration of the fine line there can be between deal or no deal, and why it is important that parties to negotiations be clear as to their contractual intentions and expectations.

Background

Readings [2] entered discussions with Bayfair [3] in 2015 as to the possible lease by Readings of part of a proposed expansion of the Bayfair Shopping Centre in Mount Maunganui for a cinema complex.

Readings submitted a proposal in December 2015 setting out its terms and attaching a form of Heads of Agreement (‘Original HOA’) knowing it was one of four potential operators.

The Original HOA contained a number of conditions including execution of an agreement to lease and deed of lease and both boards of directors’ approval.

Negotiations proceeded into mid 2016. In May, Readings emailed Bayfair advising it was willing to ‘upgrade’ certain aspects of the Original HOA including the percentage rent formula. Further discussions ensued with Bayfair endeavouring to improve the terms (e.g. increased occupancy costs and a longer guarantee).

In June 2016, Readings advised Bayfair that they wanted to move forward with the project and that an amended heads of agreement (‘Amended HOA’) would be submitted to its board. A few days later Bayfair responded by letter (‘the June Letter’) advising that, on the basis of Readings’ confirmation, it had instructed its solicitors to prepare the lease documentation.

In February 2017, Bayfair advised Readings that the cinema deal had been given to one of Readings’ competitors. Readings argued that the June Letter was acceptance of the Amended HOA, that the parties therefore had a binding agreement to lease and Bayfair had repudiated that agreement. Bayfair rejected that assertion and the matter came before the Court.

Had a binding agreement to lease been formed?

One of the main issues before the Court was whether there was a binding agreement to lease (in the form of the Amended HOA). Bayfair argued that Readings could not show that there was any intention by either party to be bound by any contract to lease the premises. To the contrary, the June Letter made no explicit acceptance of Readings’ offer (the Amended HOA) nor could this be inferred. Bayfair also noted that the parties were sophisticated commercial entities and the nature of this transaction was the type where the Courts adopt a starting presumption that the parties do not intend to be bound before a formal agreement has been executed. Further, there could be no binding contract where conditions precedent for the existence of the contract had not been met (i.e. board of directors’ approval).

Readings’ submission was that, taken together, the Amended HOA and the June Letter contained all the essential terms of an agreement. They relied on case law principles which included:

  • Provided there is a sufficient framework for determining the undetermined aspects of a contract, the Court can ‘cure’ an omission by implying a term.
  • The conduct of the parties after the formation of the alleged contract can be considered to determine if a contract was formed.

The Court regarded the question of whether the parties intended to be bound as paramount. It is only if that stage is reached that the Court will then go on and strive to give effect to that intention by ‘filling any gaps’ in the parties’ agreement.

In determining whether the parties intended to be bound, the Court can look at the words of the agreement, background facts (including statements made by the parties in the course of the negotiations, and any draft contract terms) and the parties’ conduct after the contract was purported to have been made. If the Court does find, taking a neutral approach, that the parties did intend to enter into a contract it will do its best to give effect to their intention (despite any omissions or ambiguities).

The Court found in Bayfair’s favour: it agreed with Bayfair’s submission that, given the nature of the negotiation (pertaining to a very substantial commercial transaction), there was no intention by the parties to be bound unless and until the formal documentation was signed.

What does this mean for you?

The take-out from this case is the importance of being clear, in your negotiations, as to your intention to be bound (or not) by your negotiations. The fraught nature of the negotiations in this case, and the legal battle that ensued, could easily have been avoided had the parties been clear as to their intentions to be bound (or not) at every step of the way. Although heads of agreement are sometimes intended to be binding, this is often not the parties’ intention and the simple communication of this from one party to another may be all that is required to avoid misunderstandings and consequential disputes. Do not rely merely on the presumption that, in negotiations of significant commercial transactions, the parties do not intend to be bound unless and until formal documentation is signed. A presumption is not always sufficient and it is preferable that this is put out of doubt. All that is required is a communication from one party to the other stating that, to avoid doubt, they do not intend to be bound unless and until a formal agreement to lease is signed.

FOOTNOTES

[1] [2017] NZHC 2337, 31/10/17

[2] Reading Entertainment Australia Pty Limited and Reading New Zealand Limited

[3] AMP Capital Shopping Centres Pty Limited, AMP Capital Bayfair Pty Limited and TEL Property Nominees Limited

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