Contractual promises – are they binding?

What was the effect of the Landlord’s promise to “take care of the tenant”?

Representations made in the course of negotiations may result in an agreement collateral to the main agreement if it can be concluded that the parties intended that the representation be contractually binding.[1]  In the case of Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26 the High Court had to determine whether or not whether a representation made by a landlord, to the extent that the landlord’s representative stated that the tenant would be “looked after at renewal time”, gave rise to a collateral contract which the landlord was obliged to offer the tenant further leases for a term of five years each.

Background              

Crown Melbourne Limited (Landlord) is the owner of the Melbourne Casino and Entertainment Complex.  The Landlord leased two premises in the complex to Cosmopolitan Hotel (Vic) Pty Ltd (Tenant).

In 2005 the Landlord and the Tenant commenced negotiations for new leases with respect to the premises.  The new leases which were offered by the Landlord were limited to a term of five years and did not contain an option for renewal. 

Clause 2.3 of each lease provided that the Landlord was to give at least six months notice to the Tenant prior to the expiration of the lease stating whether:

(a)        the Landlord will renew this Lease, and on what terms (this may include a requirement to refurbish the Premises or to move to different premises…);

(b)        the Landlord will allow the Tenant to occupy the Premises on a monthly tenancy after the Expiry Date; or

(c)    the Landlord will require the Tenant to vacate the Premises by the Expiry Date.

It was a condition of the leases that a major refurbishment of the premises be undertaken by the Tenant.  Concerned about the cost of the refurbishment and the extent of this obligation under the leases, the Tenant’s representative, Mr Zampelis, sought to obtain a commitment from the Landlord to allow the Tenant to continue to trade for a further five years upon the expiry of the initial term.  The Landlord was unwilling to offer any further term on the leases.  The leases, limited to a term of five years, were signed by the Tenant in November 2005.

In October 2008 the Landlord invited tenders for new leases of the premises and the Tenant submitted tenders in March 2009.  In December 2008 the Landlord gave notice to the Tenant requiring the Tenant to vacate the premises on the expiration of the lease.

VCAT proceedings

In July 2010 the Tenant commenced proceedings in the Victorian Civil and Administrative Tribunal (VCAT) against the Landlord.  The Tenant alleged that a series of representations had been made to Mr Zampelis to the effect that the Tenant would be given an extra term of five years following the expiration of the lease (Representations).

The Tenant claimed (among other things):

• the Representations amounted to a promise that the Landlord would offer a renewal for a further five year term at the end of the lease; 
• to have been induced by the Representations to execute the leases and to carry out the refurbishments; and
• the Representations gave rise to a collateral contract pursuant to which the Landlord was obliged to offer the Tenant further five year leases.

The VCAT found that the Representation gave rise to a collateral contract.

In particular, the VCAT made a specific finding while the Landlord did not expressly state that it would renew the leases, the Landlord’s representative had said that Mr Zampelis (and therefore the Tenant) would be “looked after at renewal time” (Statement).  In the Tribunal’s view, the Landlord’s promise did not require the Landlord to offer any particular terms to the Tenant, other than the five year term. 

Appeal to the Supreme Court of Victoria

The Landlord appealed the VCAT’s decision to the Supreme Court of Victoria.  The Supreme Court held that the VCAT was in error and that the Statement did not give rise to an enforceable obligation pursuant to a collateral contract.  The Statement was found to be no more than “vaguely encouraging” and the obligation which arose from the Statement was illusory and unenforceable.[2]

The Supreme Court’s decision was also upheld on appeal to the Victorian Court of Appeal.

Application to the High Court

The Tenant applied to the High Court for special leave to cross-appeal on the ground that no question of lease was involved in the question whether there was a collateral contract (or an estoppel) and, therefore, no right appeal to the Supreme Court.

In determining its decision, the High Court had to determine:

• whether an assurance given by the Landlord that the Tenant would be “looked after at renewal time” could lead to a further lease by way of estoppel; and
• whether an enforceable collateral contract came into force between the Landlord and the Tenant whereby the Landlord was obliged, on the expiration of the leases, to grant the Tenant a new lease on the terms having a reasonable correspondence with the terms of the original leases.  

The decision

The High Court held that:

• the Statement was not capable of conveying to a reasonable person that the Tenant would be offered a further lease; and
• the Landlord’s promise to “take care of the Tenant” was no more and no less than a promise to make an offer to the Tenant.  

At [59] Gageler J said:

There is a material difference between an agreement to agree and an agreement to offer.  To agree to agree is to defer the whole or some part of an agreement to the future.  To agree to offer is to enter into a present agreement to propose terms capable of resulting in a further future agreement if accepted.  The agreement to make an offer is an agreement that is complete in itself.

At [130] Keane J said that the Landlord was left free to act in its own interests in negotiating the terms of any further lease and no agreement had been concluded.

Lavan Legal comment

This case highlights the well known advice that all of the terms of the contract must be set out in the contract.  Failure to do so, can result in terms that are not included in the contract not being enforceable.

In Western Australia, there is the added requirement of s34 of the Property Law Act 1969 (WA).  That section provides that interests in land must be recorded in writing.  A lease creates an interest in land and must, therefore, be in writing.  There are some exceptions to this, such as with respect to retail leases governed by the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA).