Signed, Sealed… Delivered - A Summary of Centuria Property Funds Ltd v Thorn Australia Pty Ltd [2022] NSWCA 104

In negotiating commercial transactions, it is often the case that little thought is given to the process, and consequences, of how the resulting legal documents would come into effect. This case serves as a reminder that parties should be mindful of the process agreed under a heads of agreement.

SUMMARY OF FACTS

Centuria Property Funds Ltd (Landlord) and Thorn Australia Pty Ltd (Tenant) entered into a heads of agreement setting out the terms upon which the Landlord would lease the premises to the Tenant (Heads of Agreement). 

The Heads of Agreement expressly reserved the parties’ right to withdraw from negotiations at any time prior to the execution of formal lease documents (being a lease and an incentive deed) by both parties (Lease Documents).

The Tenant sought to withdraw from negotiations (and successfully did so) despite:

• having provided to the Landlord the Lease Documents executed by the Tenant; and
• having sought, and been granted, early access to the premises for the purposes of installing telecommunications equipment and arranging fit outs.

The Landlord’s position that the Lease Documents were binding on the Tenant upon physical delivery of the Tenant executed Lease Documents (supported by the Tenant’s conduct in seeking and accessing the premises early) was rejected by the NSW Court of Appeal. 

The Court found that the position under the Heads of Agreement prevailed, and the Tenant had a right to withdraw from negotiations at any time before the Lease Documents were executed by the Landlord.

TIMELINE

On 29 June 2021, the Tenant provided to the Landlord’s solicitor the Tenant executed Lease Documents on the proviso that the Landlord’s solicitor was not authorised to exchange the Lease Documents until written authorisation was given.

On 5 July 2021, the Landlord’s solicitor clarified that there will be no exchange of the Lease Documents and the normal process was to have the Tenant executed Lease Documents sent to the Landlord for signing, upon which the fully executed documents would be provided to the Tenant for registration.

Due to the lockdown resulting from the Covid-19 pandemic, the Landlord did not execute the Lease Documents for a number of months. During this time, the Tenant requested (and was granted, on some occasions) early access to the premises for the purposes of obtaining quotes and arranging for telecommunication works to be undertaken. 

On 16 August 2021, the Tenant informed the Landlord that it would be withdrawing from the transaction. As the Landlord had not executed the Lease Documents at this point, the Tenant’s position is that there was no binding agreement between the parties.

On 19 August 2021, the Landlord executed and provided the Lease Documents to the Tenant, and advised that the lease will be registered. 

FIRST INSTANCE

The Tenant brought proceedings to restrain the Landlord from registering the lease and sought a declaration from the NSW Supreme Court that there was no binding lease. 

The primary judge found that the Lease Documents (expressed as deeds) were not binding as:

• the Tenant did not ‘deliver’ the executed Lease Documents as is required for binding deeds to come into effect. The Tenant did not evince an intention to immediately to be bound by executing and providing those documents to the Landlord; and
• the right to withdraw from negotiations before the Lease Documents had been executed by both parties under the Heads of Agreement had not been abrogated or abandoned by the actions of the Tenant.

The Landlord appealed the decision.

DECISION IN THE NSWCA

The NSW Court of Appeal found that the primary judge did not err in its findings and dismissed the Landlord’s appeal. The Court found that:

• at the time the Heads of Agreement was entered into, it was clear that the parties intended not to be bound prior to the execution of the Lease Documents by both the Landlord and the Tenant;
• there was nothing in the parties’ conduct which suggested that the right under the Heads of Agreement would be altered upon the provision of the Tenant executed Lease Documents to the Landlord. That is, the right to withdraw under the Heads of Agreement was not inconsistent with the parties’ subsequent agreement on how the Lease Documents would come into force;
• whether ‘delivery’ occurred when the Tenant provided the Tenant executed Lease Documents to the Landlord is a question of fact to be determined by reference to the words and conduct of the parties and the circumstances surrounding the execution and delivery of the deeds, including the subsequent conduct of the parties; and
• the fact that the Tenant sought and was granted early access to the premises for fit out works is of little significance in determining whether the Tenant had an intention to be immediately bound by the Lease Documents. The Court’s position is that:
  • the granting of early access to the premises was akin to an informal licence arrangement and was not unequivocally referable to any particular obligations under the Lease Documents;
  • while the Heads of Agreement provided for early access to be granted to the Tenant, it was not binding on the parties but a statement of intent; and
  • in response to the Landlord’s hypothetical scenario whereby access is granted to a party who later withdraws from negotiations without consequence, the Court held that any resulting prejudice to the Landlord in allowing such early access would simply constitute a commercial risk that must be borne.

One lesson from this case is that parties to a contract must consider all requests made by a party to the contract in the context of the terms of the contract. In this case, if the Landlord had considered the Tenant’s request for access to the premises in the context of the terms of the Heads of Agreement, the Landlord would have had the opportunity to deal with the provision in the Heads of Agreement that the parties could withdraw from negotiations at any time before the execution of the formal lease documents.