In 2003, the previous owner leased the relevant premises to the tenant for three years expiring on 30 June 2006 and by a separate agreement, licenced it to use six car bays on the Property for the same period.
The tenant exercised its options and renewed the lease and the licence for an additional three years expiring on 30 June 2009.
In 2007, the respondent became the registered proprietor of the Property.
The Original Lease contained a holding over provision which meant that if the tenant remained in possession of the Premises after the expiry of the lease, it would be a monthly tenant; this could be terminated by either party giving one month's written notice to the other.
By an email of 11 May 2009, the owner's agent sent the tenant a proposal for a new lease. The proposal was not acceptable to the tenant; it objected to the amount of the rent and the 6 month period for which a bank guarantee was required.
The agent responded by email of 3 June 2009 as follows:
Further to your email below and our various conversations, we have confirmed with the Lessor that they are prepared to accept a 3 month Bank Guarantee.Later on 3 June 2009, the tenant sent an email to the agent which stated, relevantly:
For the purposes of clarity, we have prepared the attached revised proposal outlining all of the agreed terms.
Can you please confirm in writing at your earliest that these terms are acceptable to [the tenant] such that we can instruct the Lessor's solicitors to prepare the draft documentation.
[W]e just noticed the original proposal had annual increases of 5%, but this proposal now incorporates CPI increases. If we can revert back to the fixed increases offering, I believe we will be able to accept the offer tomorrow.On 4 June 2009, the agent sent an email to the tenant which contained a revised proposal for a new lease. The revised proposal provided for a fixed annual rent increase of 5% on each rent review date. In the email the agent made this request:
Can you please confirm in writing that this proposal is acceptable to [the tenant] and we will arrange for [the landlord's] solicitors to prepare the draft documentation.The revised proposal contained a material error: It stated that the licence fee for the six car bays was $375 per bay per annum; It should have stated that the fee was $375 per bay per month.
On 10 June 2009, the tenant sent two emails to the agent.
The first stated:
Vantage Systems [the tenant] is happy with the terms of the proposal.The second read:
I have just emailed [the sub-tenant], and requested their acceptance of these terms in writing.
I expect no problems, and we should be good to start wrapping it all up.
We have received our sub-tenants [sic] approval of the terms as well.The landlord's case was that the revised proposal and the tenant's emails of 10 June 2009 constituted an agreement to lease.
Please proceed with wrapping this up.
On 11 June 2009, the agent sent an email to the landlord's solicitors, informing them that 'agreement has been reached between the landlord ... and the tenant ... to renew their lease'. The email then said:
[C]an you please prepare draft Lease and Car Parking Licence documentation for review by the parties.
On receipt of the documents the agent noticed that the licence fee specified in the draft licence agreement was incorrect. This was corrected.
Despite sending the draft lease and licence agreements to the tenant in early July 2009, these documents were not executed by the tenant.
The landlord sent invoices to the tenant for rent in respect of the months of July, August and September 2009 based on the amount of rent payable under the Original Lease as renewed, and the tenant paid the rent as invoiced.
An invoice was eventually sent by the agent to the tenant for the additional rental at a monthly rate in advance calculated on the basis of the difference between the rental under the Original Lease as renewed and the rental prescribed under the alleged agreement for lease. The rental was claimed in advance. The additional rental claimed in each of the months of July, August and September 2009 was $1,556.68 (inclusive of GST).
In late September 2009, solicitors acting on behalf of the sub-tenant, informed the tenant that:
(a) There was no binding agreement in relation to 'the proposed sublease';
(b) The sub-tenant had no legal obligation to enter into a sublease 'if and when one becomes available for the Premises'; and
(c) The sub-tenant intended to vacate the part of the Premises it occupied on or before 31 October 2009.
On 30 September 2009, the sub-tenant gave the tenant a document in which it purported to terminate its alleged 'tenancy at will' by one month's notice.
By letter dated 6 October 2009, solicitors acting on behalf of the tenant informed the landlord, in essence, that no concluded agreement to lease had been made between the landlord and the tenant, the tenant was occupying the Premises pursuant to the holding over provision in the Original Lease as renewed, and the tenant would vacate the Premises on 30 November 2009.
On 21 October 2009, the landlord's lawyers disputed the tenant's alleged right to vacate the Premises and asserted that the tenant was bound by a concluded agreement to lease with the landlord.
The decisionThe trial judge concluded that the parties intended to enter into a binding agreement for lease by the acceptance of the [revised] proposal by the tenant. The trial judge was satisfied that 'the agreement for lease, having adequately set out the essential terms, was sufficiently certain to be enforceable'.
On appeal, the fundamental question in the case was, did the parties intend that, upon the tenant accepting the revised proposal, they would be bound immediately and exclusively by the express and any implied terms of the revised proposal, while expecting to execute formal lease and licence agreements in substitution for the earlier agreement which would contain, by consensus and after negotiation, additional terms?
The Court of Appeal of Western Australia concluded that there was an immediately binding agreement, and that agreement would be superseded by formal lease and licence agreement once drafted and executed.
The Court concluded that it is to be inferred, on an objective assessment, that upon the tenant accepting the revised proposal the parties intended that:
(a) there should be a concluded and binding agreement to lease the Premises and take a licence in respect of six car bays;
(b) the parties would be bound immediately and exclusively by the express and any implied terms of the revised proposal;
(c) the concluded and binding agreement to lease the Premises and take a licence in respect of six car bays would in due course be superseded by formal lease and licence agreements to be prepared by the landlord's solicitors and executed by the parties; and
(d) the formal agreements would be in the form of the landlord's standard lease and licence agreements, but those standard agreements would be amended to incorporate the express terms of the revised proposal and any other provisions which may, by negotiation, be agreed upon between the parties.
The subsequent negotiations, dealings and communications between the parties did not destroy the earlier concluded and binding agreement between them. In particular, the subsequent negotiations, dealings and communications did not operate to rescind or otherwise discharge the earlier agreement.
The risk for negotiating parties
This case highlights the risk for parties who are negotiating lease agreements: great care must be taken when communicating with the other side.
If you intend that the negotiations are not to be binding, that should be clearly communicated (both up front and during the course of ongoing negotiations).
It should be made specific that any negotiations regarding the proposed agreement are subject to a formal written and executed document setting out the final terms of the agreement to be concluded between the parties.
Enforceable agreement by email
The other matter of note to come from this case is that parties can bind themselves to an enforceable agreement to lease by email, without the necessity of a formal, signed document.
W G Stark
Hayden Starke Chambers