Tuesday 23 June 2015

Can a contract to purchase real estate be formed by email?


Regular readers will recall that I recently posted about whether an agreement to lease can be formed by email (as examined in Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd [2015] WASCA 21)?



In reality, that case did nothing more than apply the existing law.



In Masters V Cameron (1954) 91 CLR 353, the High Court pointed out (at paragraph 9) that:

Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three cases. It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract. (at p360)



The High Court concluded that in each of the first two cases there is a binding contract:

… in the first case a contract binding the parties at once to perform the agreed terms whether the contemplated formal document comes into existence or not, and to join (if they have so agreed) in settling and executing the formal document; and in the second case a contract binding the parties to join in bringing the formal contract into existence and then to carry it into execution.



In Stellard Pty Ltd & Anor v North Queensland Fuel Pty Ltd [2015] QSC 119, Justice Martin of the Supreme Court of Queensland was recently called on to determine whether a contract to purchase real estate can be formed by email?



The judgment was delivered on 15 May 2015.



The purchasers claimed that a contract for the sale of a freehold property and business was constituted by an email exchange between them and North Queensland Fuel Pty Ltd (NQF). NQF denied the claim, and argued that there was no intention to be legally bound by that exchange and, in any event, there was no sufficient written memorandum or note to satisfy s 59 of the Property Law Act 1974 (“PLA”).



Background Facts

NQF owned the Koah Roadhouse in far-north Queensland. NQF appointed an agent to sell the freehold and the business; in October 2014 the roadhouse was listed for sale.



On the 17th of October 2014, the plaintiff’s representative, Mr Hurry, attended the roadhouse for an inspection of the premises with NQF and the agent. During that inspection Mr Hurry said words to the following effect:

(a)   He represented United Petroleum and its associated entities;

(b)   He was interested in the roadhouse;

(c)    Any contract would be conditional on “due diligence”;

(d)   The contract would contain conditions relating to an environmental site assessment and a “tanks and lines” integrity test; and

(e)   He would need to see the “financials” for the business for the last two completed financial years.



During the inspection the agent provided a number of documents and financial records to Mr Hurry. In emails of 28 October 2014 the agent provided further records of the roadhouse “to assist with due diligence” including a profit and loss statement.



On 30 October 2014 there were telephone discussions between the agent and Mr Hurry. In those discussions Mr Hurry said that United Petroleum’s associated entities (the First and Second Plaintiffs) would be the buyers with separate contracts for the freehold and the business. Mr Beattie responded that NQF wanted a single contract. Mr Hurry said that he wanted to know the vendor’s terms so that he could get authority to make a formal offer.



On 30 October 2014, the agent sent an email to Mr Hurry stating that the vendors would sign a single contract (with a number of terms outlined). A draft contract of sale was attached to the email containing a special condition relating to a personal guarantee to be given by the directors of the purchaser.



On 31 October 2014 the agent and Mr Hurry had further telephone discussions. In those discussions Mr Hurry said that:

(a)   Although the first plaintiff would buy the subject land and the second plaintiff would buy the business, they agreed to the use of a single contract; and

(b)   The contract would be generally on the terms of the agent’s email of 30 October 2014, with due diligence including: environmental investigations, tank and line testing, and the outstanding “financials”.



The agent asked that this offer be put in writing.



At 4.24pm on 31 October 2014 Mr Hurry sent an email (“the offer email”) to the agent as follows:

Jay, further to our various discussions, I can confirm our offer of $1,600,000 for the business and freehold of the above property. As advised the freeholds are purchased by an entity related to the two Directors/Owners of United Petroleum, which in this case will be Stellard Pty Ltd.

This offer is of course subject to contract and due diligence as previously discussed. We are hopeful of effecting an exchange of contracts next Monday but need acceptance of our offer immediately so we are in a position to instruct the appropriate consultants to carry out the necessary investigations.

I look forward receiving your client’s confirmation that our offer is accepted as clearly both parties are now going to start incurring significant expenses.



Approximately 45 minutes later, the vendor sent an email (“the acceptance email”) to the agent and Mr Hurry in response to the offer email. It was copied to a solicitor, and other officers of the vendor. It contained the following:

Hi Jay and Martin,

We accept the below offer which we understand will be subject to execution of the Contract provided (with agreed amendments) on Monday, minimal due diligence period and the provision of all information/reports etc that are obtained by the purchaser during the due diligence period.

We look forward to progressing the matter further on Monday.



A few days later the vendor purported to pull out of the negotiations; it had apparently been dealing with another potential purchaser at the same time who made a better offer, and the vendor wished to deal with that purchaser instead.



Court’s analysis of the law

In the offer email these words are used: “This offer is of course subject to contract and due diligence as previously discussed.”



In the acceptance email the defendant says “We accept the below offer which we understand will be subject to execution of the Contract provided (with agreed amendments) on Monday ...” (emphasis added).



The court concluded (at paragraph 39):

The broader context of the two emails and the other expressions used in them strongly suggests that the parties “were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms.



And at paragraph 41:

 The words used by the plaintiffs as to the effect of acceptance is clear from the closing words of the email:

“I look forward receiving your client’s confirmation that our offer is accepted as clearly both parties are now going to start incurring significant expenses.”



In concluding what had been agreed (at paragraph 53) the court noted that the parties had agreed:

        (a) What was to be sold;

        (b) The purchase price;

        (c) The deposit;

        (d) When stock was to be valued;

        (e) When the testing of tanks and lines was to occur;

        (f) The term of the due diligence period;

        (g) When settlement was to take place; and

        (h) Where it was to take place.



In the circumstances, the court held that there was a contract for the sale of the Koah Roadhouse.



The vendor argued that, if a contract was found to exist, then there is no sufficient writing to satisfy s 59 of the PLA (which is in similar terms to section 126 of the Instruments Act, 1958 (Vic).



Section 59 provides:

No action may be brought upon any contract for the sale or other disposition of land or any interest in land unless the contract upon which such action is brought, or some memorandum or note of the contract, is in writing, and signed by the party to be charged, or by some person by the party lawfully authorised.



The vendor’s argument was directed to the operation of the Electronic Transactions (Queensland) Act 2001 (“ETQ Act”).



Section 14 of the ETQ Act provides:

 (1) If, under a State law, a person’s signature is required, the requirement is taken to have been met for an electronic communication if—

(a) a method is used to identify the person and to indicate the person’s intention in relation to the information communicated; and

(b) the method used was either—

(i) as reliable as appropriate for the purposes for which the electronic communication was generated or communicated, having regard to all the circumstances, including any relevant agreement; or

(ii) proven in fact to have fulfilled the functions described in paragraph (a), by itself or together with further evidence; and

(c) the person to whom the signature is required to be given consents to the requirement being met by using the method mentioned in paragraph (a).

(2) The reference in subsection (1) to a law that requires a signature includes a reference to a law that provides consequences for the absence of a signature.”



The vendor put a very technical argument that the purchaser and it had not complied explicitly with the requirements of that Act, as therefore there could be no acceptance by email.



The court dismissed this argument and held:

In circumstances where parties have engaged in negotiation by email and, in particular, where an offer is made by email, then it is open to the court to infer that consent has been given by conduct of the other party.



This case confirms that:

(a)   When conducting negotiations, it is extremely important to be very clear about whether you intend to be bound by the result of the ongoing negotiations between the parties; and

(b)   The courts are (slowly) catching up with the reality of the way in which modern business transactions are being conducted in the real world.



In these modern times, it is not unusual for most, if not all communications in business to be conducted by email. This case confirms that such a transaction can be legally binding.



In my opinion, it will not be long before we have a case about an agreement for the lease or purchase of real estate that has been concluded by text message.



W G Stark

Hayden Starke Chambers

With assistance from Wilcox & Associates and Ross Eason

Monday 22 June 2015

Can a binding agreement to lease be created by email?

In January 2015, the Western Australian Court of Appeal delivered its decision on whether an agreement to lease can be created by email in Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd [2015] WASCA 21. In that case Buss JA delivered the main judgment, with McClure P and Newnes JA agreeing. 

Summary of relevant facts


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.

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.
Later on 3 June 2009, the tenant sent an email to the agent which stated, relevantly:
[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.

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.
The second read:
We have received our sub-tenants [sic] approval of the terms as well.

Please proceed with wrapping this up.
The landlord's case was that the revised proposal and the tenant's emails of 10 June 2009 constituted an agreement to lease.

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 decision

The 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