‘Subject to’ conditions - is the offer binding or not?

Key issues:

• Two recent court decisions have illustrated the importance of clearly drafting ‘subject to’ conditions when signing offers to purchase or lease proposals.
• The decision in Realm Resources Ltd v Aurora Place Investments Pty Ltd highlights the importance of clearly stating when legal documentation is intended to be binding.
• The decision in The Edge Development Group Pty Ltd v Jack Road Investments Pty Ltd highlights that a written agreement is not necessarily binding if it suggests that the parties intend to be bound at some future point in time.  

The decision in Realm Resources Ltd

In Realm Resources Ltd v Aurora Place Investments Pty Ltd [2019] NSWSC 379, Aurora (as sub-lessor) and Realm (as sub-lessee) signed a lease proposal for a five-year sublease of office space in Sydney’s CBD. The lease proposal contained the following ‘subject to’ condition:

“The terms and conditions of this proposal are subject to:

1. the availability of the premises;

2. lessor’s board approval; and

3. satisfactory legal documentation being entered into by the parties.”

On 15 August 2017, Realm’s solicitors couriered the sublease signed by Realm to Aurora’s solicitors.  In the days following, there was some discussion between the parties’ solicitors as to the need for Realm to send through certificates of currency of insurance before Aurora could execute the sublease.  This culminated in an email from Realm’s solicitors on 23 August 2017 attaching the required certificates. From that date, all the necessary ancillary documents had been provided to Aurora. The sub-lease was to commence on 1 September 2017.  

On 24 August 2017, Realm’s solicitors requested that Aurora hold off signing the sublease and hold the partly executed sublease in escrow pending further communication. At this point, the sublease had not been signed by Aurora. Aurora’s board approval was subsequently obtained and the sublease was signed on Aurora’s behalf on 25 August 2017 despite the direction from Realm’s solicitors. A scanned copy was sent to Realm’s solicitors on the same day.  

Realm formed the view that their email from the previous day meant the sublease could not have been validly signed by Aurora after that point. Realm consequently sought a declaration that it was not bound by the sublease.  

The central issue for the Court was whether the sublease had been “entered into by the parties” as required under the lease proposal. The absence of any elabouration of what was meant by the sublease being “entered into” meant that phrase was left for the Court’s interpretation. The Court concluded that the sublease was “entered into” and became legally binding when Realm delivered the sublease. The following reasons were given:

• the sublease was intended to take effect as a deed and thus became immediately binding as evidenced by a clause in the sublease which stated that it was “a deed, even if it is not registered”;
• the formal requirements for a deed pursuant to s127 of the Corporations Act 2001 (Cth) had been satisfied; and
• the executing party (i.e. Realm) delivered the deed with the “intention to be bound immediately”, “subject only to satisfaction of the condition that Aurora bind itself”.

A good example of the operation of a condition which provides that a particular offer is “subject to formal documentation being executed” follows below.

The decision in The Edge Development Group

In The Edge Development Group Pty Ltd v Jack Road Investments Pty Ltd [2019] VSCA 91, the parties to a contract for the sale of land signed an offer to purchase (Offer).  

The terms of the Offer were that the Edge Group (as purchaser) would pay $6 million for the property with a 20% deposit to be paid on execution of the contract and 1% payable on signing the Offer. A condition of the Offer was that it was “subject to the contract being executed”.  

During negotiations and after the payment of the 1% deposit, Jack Road Investments (as seller) received a higher offer from a third party and sought to withdraw from the deal. Edge Group lodged a caveat on the property and sought specific performance of the Offer. At this time, neither party had signed a final contract for sale.   

The Victorian Court of Appeal concluded that the parties were not intended to be bound until the execution of the formal contract (described as the “third category” in the High Court decision of Masters v Cameron). That conclusion was based on the following:

• the offer was clearly expressed to be “subject to the contract being executed” which demonstrated that the agreement did not constitute the contract but would form the basis of a future contract;
• there was still significant scope for negotiation between the parties; and
• the final execution of the contract was a turning point in the transaction because it marked the finalisation of certain key terms: payment of the balance deposit, early access to the premises, and keeping the contract confidential. Consequently, there was no commercial purpose in having the contract binding before the contract was executed, given the absence of these terms.  

Implications for drafting offer documents

These decisions illustrate the importance of clearly drafted ‘subject to’ conditions which capture precisely when the parties intend to be legally bound by the terms of their bargain. In particular the decision in Realm Resources demonstrates that it is important to have regard to the form of formal documentation (i.e. a deed or agreement) when expressing an offer to be subject to formal documentation being ‘entered into’ or ‘signed by both parties’. This is particularly important when dealing with deeds, which may become binding on the parties earlier than expected, as was the case in Realm Resources.

The ideal timing for parties to be bound by documentation will largely depend on the parties’ intentions and commercial objectives. There may be a particular commercial reason for the parties wishing to be bound immediately or otherwise.

Although both cases arose as a result of a party to the transaction seeking to walk away from an agreement prior to execution of a final contract, properly drafted ‘subject to’ conditions may have avoided the need to litigate the disputes. 

Should you require any further information or advice in regards to offer documentation or ‘subject to’ conditions, please contact a member of HopgoodGanim Lawyers’ Property team.