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In these difficult economic times it is more important than ever that we help our landlord and tenant clients to make it easy for people to do  business with them.  Poor documents, procedures and advice slow down the leasing process, and in some cases a tenant walks away because it just gets too hard. We should resolve not to put anything in the way of a good deal happening quickly. 

 

 

Agents commonly set out the terms of a proposed lease in a document called a “Heads of Agreement” and request the tenant to sign it. The reason for doing this could be simply to record the proposed terms, but it also might be that the agent wants to try and set the terms in concrete so that the proposed tenant (or more likely their lawyer) will not ask for any changes. What is the legal effect of such a document? 

 

It is generally believed that a Heads of Agreement is an informal and non-binding document which does nothing more than set out the proposed agreement between the parties. However, if the parties are not careful, the Heads of Agreement can be a binding legally enforceable contract.

 

A contract is formed by an offer and an acceptance of that offer. Where the offer relates to land, such as a lease or sale, the offer and acceptance must be in writing.  If, despite the fact that a document is called a “Heads of Agreement” it sets out all of the elements required for a binding contract, it can constitute an enforceable lease or contract for sale.  

 

In one case in which we were involved, the owner sent a letter to a proposed tenant with a covering letter saying: 

 

“Attached is an offer to lease [premises]. Please sign your acceptance of the offer and return the document to us. Our lawyers will send a lease to you to sign.” 

 

The owner was not able to proceed with the lease and argued that the letter was not a binding offer as the tenant had to sign a lease.  The tenant argued that there was a binding lease and it was only a question of making sure that the lease contained all of the terms in the letter of offer.  Ultimately the dispute came down to the amount of damages to be paid to the proposed tenant.

 

Any Heads of Agreement must clearly state that it is not an offer, and that the proposal is subject to a formal lease being prepared and signed.  It should never ask the proposed tenant to “accept” the terms. While it is probably better not to use the words “Heads of Agreement” at all, it is important to remember that any document, no matter what it is called, can be a legally enforceable agreement if it constitutes an offer and an acceptance.

 

 

You have to be particularly careful when it comes to retail leases, as the case of Helou v Bong Bong Pty Limited  illustrates. 

 

The Helous were holding over under an expired lease. After the usual round of discussions and negotiations the owner sent a letter to the tenant (which the tenant signed) which included the following:

 

Thank you for your expression of interest in the premises identified herein. Outlined herein are the terms and conditions upon which you offer to lease the premises. Upon execution by you (lessee) and acceptance by REGIONAL RETAIL PROPERTIES (lessor), this will form the basis for the agreement to lease and lease.

 

Acceptance of this offer by the lessor will not in any circumstances create a legally enforceable lease between the parties. The lease will be prepared by the lessor’s Solicitors, incorporating the above terms and conditions and no agreement will be legally enforceable unless acceptable and executed by both parties.

 

  Occupation of the premises will not be granted until the lease documentation has been completed to the satisfaction of the lessor’s solicitors, provision of bank guarantee, public risk insurance and all fees paid by the lessees.

 

The Retail Leases Act has some interesting provisions.  One of these is Section 8 which says that a retail shop lease is considered to have been entered into when a person enters into possession of the retail shop as lessee under the lease or begins to pay rent as lessee under the lease.

 

The Administrative Decisions Tribunal said:

 

... the commencement of a lease by virtue of entry into possession or payment of rent by the lessee may occur under s 8(1) even though no formal deed or agreement of lease is ever executed, so long as the parties have reached ‘consensus’ as to the terms of the lease. In order to reach this ‘consensus’, so as to give rise to the requisite ‘lease relationship’, it is not necessary that the parties reach agreement on all the terms of the right of occupation. This is an implicit consequence of the broad definition of ‘lease’ in s 3, embracing ‘any agreement’, express or implied, and whether oral, in writing, or partly oral or partly in writing, ‘under which a persongrants or agrees to grant to another person for value a right of occupation of premises for the purposes of the use of the premises as a retail shop’.

 

Despite the fact that the letter clearly said that the offer was subject to the tenant signing a lease and providing the bank guarantee, public risk insurance and fees, the ADT held that the signed letter constituted “‘consensus’ so as to give rise to the requisite ‘lease relationship’”.  The lessor wanted to back out of the deal and redevelop the centre, but the tenant was in occupation for 5 years.

 

The lesson is: it could be quite dangerous to have a sitting tenant sign any document other than a new lease.