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Before a commercial lease or retail lease is entered into the landlord and tenant will generally enter into an offer to lease. This is also commonly known as an agreement to lease or heads of agreement to lease. Depending on the wording in the initial offer to lease it may create a binding obligation on the landlord and tenant to enter into a formal lease. For that reason, it is important that the offer to lease is right. Landlords and tenants are often keen to reach an agreement on a property, but they need to understand that when signing an offer to lease they are potentially locking themselves into a lease arrangement.

This was the situation in the case of Activ Foundation Incorporated v WBHO-Carr Pty Ltd [2014] WADC 174 

Background

In this case WBHO was keen to rent an office space and signed an offer to lease with Activ

The lease was for 650 m² of office space and for a term of five years with a five-year option. The agreed initial rental was $250,000 excluding GST plus outgoings.

It was a term of the offer to lease that it remained subject to the approval of the board of WBHO. The board approved the offer to lease and the managing director of WBHO advised Activ that all approvals had been obtained.

As is often the case with an offer to lease the document contained the following clauses:

  • The lessors standard form of lease would be used
  • Both parties to sign their respective approval/acceptance of the terms.
  • The main terms of the lease including rent, rent review, term and options, identification of the premises, parties, possession to undertake a fit out, lease incentive, outgoings, car parking, approvals/permits, building alterations, signage, manner of payment of rent, and guarantee security, public liability and other insurances, and a deposit of two months gross rent.

In other words the key terms of the lease were agreed.

Based on the offer to lease a proposed formal lease was prepared and given to the tenant. About a week later WBHO advised the landlord that it had decided not to proceed with the lease.

The issue was whether the offer to lease binding

The critical issue was whether the landlord and tenant had intended to be bound by the signed offer to lease.

In this case WBHO’s position was that the initial discussions were not a concluded agreement until a final lease agreement was prepared and signed.

The court took a different view.

In the court’s opinion with the initial offer to lease the parties had agreed on the key terms to be performed pending negotiation in good faith. The court was of the view after considering all the negotiations leading up to and after the signing of the offer to lease this demonstrated an intention by the parties to make a binding commitment. The consequence of this four WBHO was that there was a binding five-year lease agreement. As WBHO did not proceed with the lease the Court ordered that WBHO pay damages to Activ for loss of rental. The damages were more than $650,000.

Key Takeaway

An offer to lease may be binding.

If a party does not intend for it to be binding, then it should clearly state that the offer is made subject to the parties entering a formal lease in a form which is mutually acceptable to them.

This case was about an agreement reached before a formal agreement was entered into. Preliminary agreements heads of agreement and memorandums of understanding are common in business. Parties need to carefully consider whether those agreements are intended to be binding or not.

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