When does intending become intention?

Executed and exchanged offer to lease found not to be binding on parties

ACME Properties Pty Ltd v Perpetual Corporate Trust Limited ATF Braeside Trust [2019] FCA 1189

Whether a legally binding agreement has been made between negotiating parties can, at times, be difficult to determine and often must be considered within the context of the discussions.  This question becomes even more challenging when the parties intend to enter into a more formal agreement at a later date.

This issue is compounded when negotiations fail and formal documents have not been entered into.  In the recent decision of ACME Properties Pty Ltd v Perpetual Corporate Trust Limited ATF Braeside Trust¹, the Federal Court was asked to determine whether a signed and exchanged preliminary agreement with respect to a lease of premises was sufficient to bind the parties.

Summary of the facts

Perpetual Corporate Trust Limited as trustee for the Braeside Trust (Perpetual), as landlord, and ACME Properties Pty Ltd (ACME), as tenant, were parties to a lease in respect of an office and two commercial warehouse buildings forming part of a distribution centre located in the industrial suburb of Braeside, Melbourne (Lease).  The Lease was due to terminate on 30 June 2019. 

Between October 2018 and March 2019, negotiations by way of email correspondence and several revisions of a draft offer to lease were exchanged between Perpetual, represented by its agent ARAM Australia Pty Ltd (ARA), and ACME.  On 25 March 2019, the parties concluded just under six months of negotiations by settling on the fourth version of the offer to lease (Offer to Lease). 

Crucially to the proceedings was that the Offer to Lease contained the following provision:

“This offer is subject to:

• Formal approval of the Landlord to be given or withheld in its absolute discretion.
• Execution of all legal document documentation (sic) by the Landlord and Tenant.”

During the course of the negotiations, the parties also agreed that either party may terminate the Lease during the term of the Lease, by giving six months’ notice.  If a party exercised such rights, the two new leases proposed by the Offer to Lease would also be terminated.

On 27 March 2019, the Offer to Lease was signed by ACME and delivered to ARA.  ARA signed the Offer to Lease on behalf of Perpetual under the words ‘Accepted for and on behalf of the Landlord’ and provided the landlord’s counterpart on 3 April 2019.

On 30 April 2019, ARA emailed ACME to inform them that no legally binding contract had been made as yet, so Perpetual would not be proceeding with the deed of variation and extension of the Lease proposed by the Offer to Lease and would instead be accepting an offer from a third party to lease the premises.  If required, Perpetual offered to extend the expiry date from 30 June 2019 to 31 July 2019 to enable ACME to relocate.²

ACME disputed Perpetual’s alleged right to terminate the Lease and asserted that Perpetual was bound by a concluded agreement to lease with ACME.

Matters to be determined

The applicable principles to the proceedings were unequivocally accepted by the parties, being, the watershed authority stated by the High Court of Australia Masters v Cameron3 (Masters and Cameron). 

What was disputed was that the parties intended to create legal relations by the Offer to Lease.  In respect of this, ACME’s argument under both claims hinged on their email dated 27 March 2019 enclosing ACME’s executed counterpart of the Offer to Lease.

ACME sought to enforce a binding agreement to lease between the parties arising out of the Offer to Lease.  In the alternative, ACME brought a claim for damages based upon, amongst other things, the grounds that Perpetual had engaged in misleading or deceptive conduct in contravention of section 18 of the Australian Consumer Law.⁴

Perpetual sought to rely on the fact that no legally binding contract had been made pursuant the Offer to Lease because the Offer to Lease was subject to Perpetual’s formal approval to be given or withheld in Perpetual’s absolute discretion and execution of all legal documentation by both parties, which as at 30 April 2019, had not been executed.

Accordingly, the matter before Justice Moshinsky was to determine:

• whether a legally binding agreement to lease was created by the signed and exchanged Offer to Lease, notwithstanding that a formal lease had yet to be agreed to; and
• whether Perpetual’s conduct was misleading or deceptive.

Masters and Cameron5 is the leading case in Australia to determine if parties had intended to create legal relations. That case recognised three classes of cases:

• 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.
• 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.
• The parties’ intention is not to make a concluded bargain at all unless and until they execute a formal contact.

In addition to these three classes, the court recognised what has come to be known as a fourth class, where a negotiation is expressed to be "subject to contract," "subject to the preparation of formal documentation" or similar expressions, these words prima facie create an overriding condition that what has been agreed must be regarded as the intended basis for a future contract and not as constituting a contract.

In the first two classes there is a concluded contract notwithstanding the formal documentation has not been executed, Clearly, this is not the case with the third class and fourth classes.

Was there a binding agreement to lease?

ACME contended that as:

• Perpetual made an offer in writing (through the Offer to Lease);
• which was unequivocally accepted by ACME (by ACME signing the Offer to Lease in accordance with Perpetual’s instructions6); and
• ACME communicating its acceptance of Perpetual’s offer in writing (by ACME providing its signed counterpart of the Offer to Lease) to Perpetual, through ARA (by ACME’s email dated 27 March 2019),

a binding contract was created on 27 March 2019.⁷

Further, the Offer to Lease evidenced a clear intention by Perpetual to create a binding agreement to lease.  As a result, in accepting Perpetual’s “all-encompassing Letter of Offer”,8 both ACME and Perpetual had ‘reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms’.⁹

The parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms.

In undertaking an objective assessment of the intention disclosed by the language the parties,10 His Honour found that the Offer to Lease did not constitute a binding agreement to lease. 

This is principally because the offer was expressed to be subject to the execution of all legal documentation, which fell within the fourth class (in addition to the other three classes) identified in Masters and Cameron, being that the natural meaning of ‘subject to contract’ and similar expressions is such that, prima facie, they create an overriding condition, “so that what has been agreed upon must be regarded as the intended basis for a future contract and not as constituting a contract”.¹¹  

In those circumstances, the parties’ intention, objectively ascertained, was not to create a binding agreement to lease.

Misleading and deceptive conduct claim

ACME pleaded that by email dated 27 March 2019, Perpetual represented to ACME that it would continue to lease part of the premises 30 June 2024 and give ACME six months’ notice to vacate if it did not wish the four-year lease from 1 July 2020 to commence pursuant to formalisation of the lease documents. ACME relied upon these representations and ordered its affairs accordingly.¹²

Justice Moshinsky found that ACME failed to establish that Perpetual made any such alleged representations.  His Honour reasoned that because the offer contained in the Offer to Lease was:

• Subject to execution of all legal documentation by the parties, which when read in context, conveyed that no contract would come into existence independently of the formal lease documentation. 
• The written approval of the Landlord (to be given or withheld in its absolute discretion), which as at 27 March 2019, had yet to be given.

Although it was contended in ACME’s concise statement, an additional assertion that Perpetual engaged in unconscionable conduct, this claim was not pressed at the hearing of the proceedings.

Practical takeaways

Lavan has been involved in a number of situations where the parties have been in disagreement as to the binding effect of offer to lease document in recent times.

This case is one of just many examples that illustrate that the point at which the parties to a negotiation for a deal or transaction are legally bound can be difficult to judge.  Consequently, disputes regarding the binding nature of contracts must always be considered objectively and within the context of the parties’ negotiations.

The recurring theme in cases of this nature is the need for parties to be clear about the intention of their communications made during negotiations and other pre-contractual proceedings.  If a party does not intend to be bound until formalisation of the contract, this should be expressly stated at the commencement of negotiations and in correspondence.

Conversely, if a party intends the parties to be bound by the precontractual negotiations and exchange of paper and correspondence, this should be clearly set out in those papers or that correspondence.

Any negotiation that is expressed to be subject to the preparation of formal legal documentation should be regarded as not binding until that documentation has been prepared and executed by the parties.

The only way to change this view is to clearly state in the concluded negotiation that the parties are bound by the terms of that negotiation notwithstanding the requirement for the preparation of formal legal documentation. In the absence of such a clear intention, the parties should not proceed on the basis that there is a concluded agreement before the formal documentation is executed.

If in doubt, parties should always proceed on the basis that there is no concluded agreement until the formal documentation has been executed.