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DOING THE DEAL: WHEN LEASE NEGOTIATIONS BECOME BINDING
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With negotiations on significant commercial agreements, there is a presumption that the parties do not intend to be bound before an agreement is drawn up and signed. However, a recent High Court case highlights that that presumption can be rebutted if all surrounding circumstances point to an intention to be bound.

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In Dunroamin Nurseries Limited v Zealandia Horticulture Limited [2013] NZHC 1074, the tenant’s silence (failure to expressly reject the landlord’s offer of lease terms), coupled with its conduct, was held to constitute acceptance of an offer to lease. As a consequence, the tenant’s purported termination of what it asserted was merely a monthly tenancy, was regarded as the repudiation (fundamental breach) of the lease.
This article looks at that case and how to ensure that you are not unwittingly bound by negotiations if that is not the intention or, conversely, an agreement is clearly concluded if that is the desired outcome.

Dunroamin Nurseries Limited v Zealandia Horticulture Limited

In Dunroamin Nurseries Limited v Zealandia Horticulture Limited, the landlord (Dunroamin Nurseries Limited) and tenant (Zealandia Horticulture Limited) had been in a business arrangement with each other for a number of years. Zealandia had used a modified greenhouse on Dunroamin’s property as a despatch depot for seedlings and bedding plants. The distribution business grew to a point where the parties decided that a larger and more suitable depot was required. A proposal was developed to demolish three old plastic greenhouses on Dunroamin’s land and to construct a new purpose built distribution depot. Once the depot was completed, Zealandia commenced operations from it, but no formal lease was signed. After three years, a dispute arose between the parties as to the terms on which Zealandia occupied the depot. This dispute culminated in Zealandia asserting that it occupied on a month to month basis and gave notice to terminate that tenancy.

The Court considered the lease negotiations between the parties which had commenced in February 2008. At that time, discussions regarding the terms of Zealandia’s use of the proposed new depot were very general and the Court could not find any concluded agreement on any aspect of the proposal.

In April 2008, there was a further meeting in which the lease terms were discussed, but again it was clear that no agreement had been reached. The landlord progressed the development, including obtaining a valuer’s advice regarding a likely annual rental figure. The landlord advised the tenant of that rent figure. The Court found that no firm offer of a rent figure was made or accepted in that conversation, but made special note of the fact that the landlord had advised the tenant of the level of rent and the tenant did not demur.

In May 2008, the landlord instructed its solicitor to prepare a deed of lease on certain terms including a ten year term commencing on 1 August 2008 with two yearly rent reviews and a five year right of renewal.

The parties met on 9 June 2008 at which time the landlord tabled the deed of lease. The directors of Zealandia did not take the deed of lease away with them from that meeting. The Court considered that there could therefore have been no offer made at that meeting otherwise the directors would have taken the lease with them to consider the offer.

However, there was a further meeting on 8 August 2008 at which time the lease was given to the Zealandia directors and taken away by them. The judge found that in handing over the copy of the lease document in the course of that meeting, Dunroamin had made a formal offer to enter into a lease with Zealandia. Zealandia did not expressly accept or reject that offer (at the meeting or subsequently). However, the judge noted that acceptance by a party of an offer made by the other party may be inferred from the totality of their conduct. When Zealandia entered into possession of the premises on 25 August 2008, it made no offer to the landlord of the terms on which it was prepared to contract nor did it give any indication (by words or conduct) that the terms, offered by the landlord (in the deed of lease previously provided) were not acceptable. The Court held that silence is not acceptance, but conduct accompanied by silence may be, and that Zealandia’s conduct could not be interpreted in any way other than an acceptance of Dunroamin’s offer.

The directors of Zealandia were adamant that they did not intend to enter into a lease on the basis set out in the deed of lease document. However, they did not convey that to the landlord. The Court therefore had to consider whether, viewed on an objective ‘reasonable bystander’ basis, Zealandia’s conduct constituted acceptance of Dunroamin’s offer. That objective test was subject to the qualification that Dunroamin must have believed that Zealandia was assenting to the terms which had been proposed by Dunroamin. The Court was satisfied that Dunroamin did have that belief.

The Court found there was no evidence of any other actual mutual intention of the parties. Fatal to Zealandia was the fact that it had not communicated to the landlord that it did not accept the landlord’s lease terms and/or did not advance its own set of terms on which it intended to enter into possession of the premises.

Accordingly, the Court found that Dunroamin had made a lease offer to Zealandia, by putting forward its form of lease, and that offer was accepted by Zealandia’s entry into possession of the premises. The Court further found there had been part performance of that contract, including Dunroamin having allowed Zealandia to take and remain in possession and having submitted rent invoices to Zealandia.

Being clear as to intention

Dunroamin highlights the importance of being clear as to whether, and at what point, the parties are bound and that failing expressly to reject or accept an offer may result in an inferred acceptance. It also shows the weight that may be given to the parties’ conduct in making an objective assessment as to whether there is an intention to be bound.

If you intend that a proposal is to be an offer capable of legal acceptance, then state this. If it is not intended that the parties are to be bound until a formal agreement is signed then, likewise, this should be stated. If the other party’s intention is unclear, then seek clarification. Don’t allow the situation to be uncertain and risk becoming bound when you do not wish to be. Equally, if you intend to have a binding contract then take steps to ensure that this is clearly achieved.

Michelle Hill is a Senior Associate at Kensington Swan in Auckland specialising in commercial property.

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Michelle Hill
Michelle Hill

Special Counsel

Auckland

+64 9 916 6374

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