You should never sign a lease without understanding all of its terms and conditions. If you don’t understand what you are agreeing to you could experience serious financial and legal problems.
Before entering into a lease it is usual for a period of negotiation to take place between the Landlord and the Tenant and it is important to understand the relationship being entered into and the rights and obligations created in the lease document. It is also important that the negotiations are conducted so that the commercial terms are agreed before a binding agreement is created as it is possible to be locked into a commercial lease without signing any paperwork if the right precautions are not taken.
There are a number of cases that illustrate the dangers that exist and where a Court has found that pre-contractual negotiations conducted by way of email were binding even where no formal contract had been signed.
The lesson for parties is to beware of emails when negotiating commercial leases and to use them carefully.
In the Western Australian Court of Appeal case of Vantage Systems Pty Ltd v Priolo Corporations Pty Ltd, the Court considered whether preliminary agreements between a landlord and tenant were binding, despite the fact that formal documents had not yet been executed.
In that case, the tenant leased commercial premises from the landlord. Before the expiration of the lease, the parties’ representatives entered into negotiations for a new lease. The landlord emailed the tenant a proposal for a new lease and amendments were negotiated by email. The tenant asked the landlord to prepare lease documents even though some minor terms were not agreed. Ultimately, the tenant did not sign the lease documents and sought to terminate its tenancy.
The Court of Appeal found that the parties had agreed to be bound immediately by an agreement to lease when the tenant accepted the landlord’s proposal for the new lease. The Court was not dissuaded by the fact that certain clauses in the lease remained in contention nor that no formal lease was ever signed.
The decision shows that a Court will not necessarily find that a binding contract is not made until it has been formally executed.
To avoid being bound by email exchanges when negotiating the terms of a contract:
Also, do not:
It is crucial that parties manage the risk of being bound by email negotiations by using emails with care and stating in every email that no binding agreement is made until a formal contract is executed.
If you or someone you know wants more information or needs help or advice, please contact us on (02) 9274 8820 or email firstname.lastname@example.org.