Heads of Agreement - What's in a name?
Questions about Leases?
Contact +61 2 9267 9800
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.
Garry Pritchard - Accredited Property Specialist
Please note that this newsletter does not contain legal advice. You should always obtain your own legal advice based on the particular circumstances of your case.
Help Desk
Search
Suite 4 Level 5
580 George Street
Sydney NSW 2000
Phone: +61 2 9267 9800
Fax: +61 2 9283 2553
580 George Street
Sydney NSW 2000
Phone: +61 2 9267 9800
Fax: +61 2 9283 2553