Is compliance with statutory obligations a requirement to establish the existence of a concluded agreement between the parties?

The courts have been asked time and time again at what point an agreement to agree becomes legally binding. But what happens when statute demands certain actions be taken to enter that contract?

In the recent case of Ausko Cooperation Pty Ltd v Junapa Pty Ltd [2021] NSWSC 615, the Supreme Court of New South Wales was tasked with balancing the stringency of the Retail Leases Act 1994 with the common law principle of an intention to make a concluded bargain.

Retail Leases at a Glance

The Retail Leases Act 1994 (NSW) (RLA), as in Western Australia, imposes additional standards on leases which involve the tenant operating a retail business on the premises.

Though what constitutes a ‘retail shop’ for the purpose of the RLA is broad, there are a number of exceptions that narrow the reach of the rules. Namely, any leased premises with a lettable area equal to or greater than 1,000 square metres is not considered a ‘retail shop’ under the RLA.

The RLA imposes additional requirements on Landlords with the intention of mitigating exploitation of smaller tenants with a lesser bargaining power. The RLA speaks to a wide range of leasing provisions, essentially setting a state-imposed standard on (among other things):

  • adjustment of rent;
  • recoverable outgoings;
  • alterations and interference with the premises
  • assignment and termination rights;
  • additional disclosures between the parties; and
  • remedies.

The Western Australian equivalent to the RLA is the Commercial Tenancy (Retail Shops) Agreement Act 1985 (WA). What constitutes a retail shop is similar in both states, so too the regulations imposed on these kinds of leases.

Case Summary

Ausko Cooperation Pty Ltd (Ausko) operated a café and gift shop from premises owned by Junapa Pty Ltd (Junapa) in Concord, West Sydney.

The tenancy first commenced in August 2015 between Ausko, Junapa and Jay Young Kim (as guarantor) by a standard form lease (Initial Lease). The term of the Initial Lease was 5 years with an option to renew for a further term of 5 years. The annual rent for the premises was $110,000.

In order to effect the option to renew for the further term, Ausko had to give notice to Junapa on or before 30 May 2020. Ausko did not give any such notice. The consequence of this was that the Initial Lease was set to end on 30 August 2020.

On 15 June 2020, Ausko’s lawyers made contact with the property managers to request a new term of the lease for a reduced amount of rent to what was provided under the Initial Lease.

Between June and September, Ausko and Junapa negotiated some key terms of a proposed new lease. The parties met a consensus on the bulk of the negotiated terms of the lease on 4 September 2020. Among other minor details, Ausko and Junapa agreed to a revised annual rent of $85,700 plus GST and a 50% rent reduction for April, May and June.

Subsequent to the negotiation, a formal lease was not prepared or executed.

For the months of October, November and December 2020, Ausko paid its monthly rent as though the new lease had been executed. The property manager continued issue rent invoices as though the Initial Lease was in holdover and still for an annual rent of $110,000.

Despite ongoing correspondence between Ausko and Junapa in November and December to finalise the form of the new lease, Junapa issued Ausko with a notice to vacate the premises on 7 January 2021.

The notice to vacate recognised that the extension of the Initial Lease had not been exercised, the term had expired, and Ausko had been occupying the premises on a periodic tenancy. The notice made clear that no agreement had been finalised as to the new lease and that Junapa would be withdrawing from negotiations. Junapa gave Ausko one month to vacate and yield up possession of the premises.

Ausko’s lawyers wrote to Junapa to object to the vacancy notice and to argue that the negotiations between June and September constituted the forming of a contract and an agreement to formalise the contract formed. When Junapa did not concede this position, Ausko commenced proceedings.

Proceedings

Ausko, as plaintiff in the proceedings, took its dispute before the Supreme Court. In the first instance, the court provided Ausko with injunctive relief pending a hearing.

Ausko’s case was centred around the negotiation of commercial terms in the email correspondence between Ausko’s lawyers and the property manager.

Ausko argued that at best the communication constituted an agreement for a new lease and at worst an agreement to have the negotiated points reframed in an official document with more precise wording.

Junapa, as defendant, rebutted Ausko’s claim, arguing that the reaching of a consensus on some terms of the lease in no way constituted a concluded bargain and that many material considerations for the new lease were yet to be made. Junapa also argued that no disclosure statement had been issued as required under the RLA, further evidencing no intention to be immediately bound.

Decision

In the absence of a final documented agreement between the parties, the Jarke J of the NSW Supreme Court was required to explore the dealing as an agreement to agree.

His Honour applied the fundamental test applied in Masters v Cameron1 for guidance. This case established three different types of agreements to agree:

  1. The parties have reached finality in all of 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;
  2. The parties have completely agreed upon all of the terms of their bargain and intend no departure from, or addition to, that which their agreed terms express or imply, but have made performance of one or more terms conditional upon the execution of a formal document; or
  3. The parties’ intention is not to make a concluded bargain at all unless and until they execute a formal contact.

Under the Masters v Cameron test, type 1 and 2 dealings will amount to a binding contract and 3 will not.

The Court considered the matters outstanding to give effect to a valid lease of these premises. Not only did the email exchanges between the parties fail to consider a number of general but important elements of a lease, but they also failed to satisfy the statutory requirements of a retail shop lease. Junapa was not able to provide a disclosure statement to Ausko because, among other things, they could not agree on the liabaility as to outgoings. In observing that the parties had complied with the RLA when the Lease was first entered into, the court found that the parties ought to have known what would constitute a retail lease compliant with the statute.

On this basis, his Honour found no concluded bargain or finality that gave rise to an agreement to lease. 

To an alternative argument by Ausko, that an agreement for lease as though the Lease would be amended in the discussed matters only, the court found again in favour of Junapa. His honour found that the Lease made a number of bespoke provisions and any new lease would be significantly different in what it contained. There was also no evidence in the correspondence to suggest that a new lease would share the same form and content as the original Lease.

The court dismissed Ausko’s claim on all points.

Lavan Comment

This case demonstrates that in determining whether a concluded agreement has been reached between the parties, compliance with the relevant statutory obligations is one of the matters to be taken into account.

In this case, the fact that the landlord had not issued the disclosure statement indicated that the parties had not reached consensus on the terms of the lease.  This was because the landlord could not complete the disclosure statement (principally around the information concerning outgoings) as the parties had not reached agreement on the respective liabilities with respect to outgoings.

However, in our opinion, a failure to issue the disclosure statement (or otherwise comply with statutory requirements) because of an oversight or wilful act of the landlord, would not be an indicator of a failure by the parties to reach a concluded agreement.

Acknowledgement 

Jack Hely, one of the lawyers in the Property and Leasing team, provided valuable input in the preparation of this article.