The NSW Court of Appeal recently allowed an appeal from a decision of the Supreme Court of NSW which found that the landlord and tenant had not entered into a lease that had been negotiated between their respective solicitors: Darzi Group Pty Ltd v Nolde Pty Ltd  NSWCA 210.
The case provides some critical lessons for landlords when dealing with their tenants. In particular, it is possible for a landlord to be bound by a lease even though the tenant has not signed the agreement or even if no written agreement has been prepared.
On 13 October 2014, the tenant and the landlord signed a heads of agreement, setting out the main terms on which the tenant would occupy a restaurant premises in the landlord’s hotel.
On 14 October 2014, the tenant occupied the premises and commenced fitting out the restaurant, although there was no formal lease was in place.
By early 2015, the landlord had not provided the tenant with a formal lease. Correspondence ensued between the parties’ solicitors, attempting to reach agreement on terms which departed from what was recorded in the heads of agreement.
Finally, on 31 May 2016, the parties (through their respective solicitors) had agreed all the terms of a formal lease. All that remained was for the lease document to be finalised, the parties to sign it and for the landlord to register it.
On 15 June 2016, the tenant’s solicitors sent the lease, duly signed by the tenant, to the landlord’s solicitors, requesting a signed counterpart and for the landlord to register the lease.
Months went by and the tenant’s solicitors did not receive a signed counterpart back from the landlord’s solicitors. All the while, the tenant was still in occupation of the premises and was paying an increased rent in accordance with the terms of the new lease which had been agreed by correspondence through the solicitors.
By 2018, it was clear that the landlord did not intend to sign and register the lease, and so the tenant commenced proceedings in the Supreme Court of NSW, seeking a declaration that the parties had entered into a lease by 15 June 2016.
Decision at first instance
The Supreme Court of NSW held that although the parties had reached agreement on the terms of the new lease, the parties did not intend to be bound to the terms of the new lease until both parties had signed and exchanged the lease. The Court also held that the tenant’s payment of increased rent was not necessarily directly referable to the new lease. Accordingly it dismissed the tenant’s claim.
The Court of Appeal’s decision
The Court of Appeal held that the parties intended to be bound to the new lease upon reaching agreement as to its terms. One of the key considerations in imputing this intention to the parties was the fact that the Court of Appeal held the parties were already in a binding legal relationship arising from the execution of the heads of agreement and the creation of a statutory lease by force of the Retail Leases Act of a minimum five year term once the tenant went into occupation.
Two of the three judges of the Court of Appeal found that their conclusion on this point was reinforced by the landlord’s acceptance of the increased rent payable under the new lease, among other conduct by the landlord subsequent to 15 June 2016.
Landlords need to be aware that when they are negotiating new terms with lessees who are already in a lease relationship, the landlord may become bound to those terms even though no agreement has been drawn up or signed.
It is therefore critical that when conducting negotiations for new terms, landlords take care to make it clear from the outset (and preferably in writing) that no binding agreement will come into force until a written agreement is prepared and has been signed by both parties.
Daniel Fleming was the solicitor for the successful appellant tenant in this case and has acted for clients across a range of property dispute matters including leases, mortgagee sales and trustee sales of co-owned property. Please feel free to contact Daniel on 02 8251 7777 or at firstname.lastname@example.org to discuss your property dispute matter.
This article is intended to provide general information in summary form on a legal topic, current at the time of publication. The contents do not constitute legal advice and should not be relied on as such. Formal legal advice should be sought in specific circumstances.