Lease signed by the tenant - can the tenant still withdraw?

The recent case of Thorn Australia Pty Ltd v Centuria Property Funds Ltd [2021] NSWSC 1217 (27 September 2021) is an example of the Court’s willingness to allow parties to walk away from lease negotiations, where the parties agreed they could do that, notwithstanding the terms of the Lease documents were finalised and agreed. We outline how the Court considered the effect of the following words in the Heads of Agreement between a prospective landlord and tenant:

“The Lessee and the Lessor reserve the right to withdraw from and terminate negotiations at any time prior to execution of formal Lease documents by both the Lessee and the Lessor.”  

The Court decided that the words “mean what they say” therefore the tenant was entitled to withdraw from negotiations prior to execution of formal Lease documents.

Summary of facts

1. The parties entered into a Heads of Agreement setting out the terms of a proposed lease transaction (which included the words above). The tenant paid the deposit.
2. The landlord’s solicitors sent the draft lease and incentive deed to the tenant’s solicitors, together with a document return checklist. 
3. The draft lease and incentive deed were negotiated and agreed. The landlord’s solicitors sent execution versions of the lease and incentive deed to the tenant’s solicitors.
4. The tenant’s solicitors advised the landlord’s solicitors that they were having the execution versions signed. The landlord’s solicitors requested that once signed, the documents to be sent to their office to check and certify before the landlord signed.
5. The tenant’s solicitors sent the landlord’s solicitors the lease and incentive deed signed by the tenant, a certificate of currency of insurance and proforma bank guarantee. There was an issue that only one incentive deed had been signed and the tenant was to sign a further copy.
6. The tenant’s solicitor advised the landlord’s solicitor that there was a takeover bid for the tenant’s holding company and a possibility that the holding company would be delisted, and requested an amendment to the lease. The amendment was subsequently agreed.
7. The tenant paid the lease registration fee into the landlord’s solicitor’s trust account. The tenant’s representatives were pressing for access to the premises to undertake works, but due to restrictions due to the COVID-19 pandemic, access was not given by the landlord. The landlord’s solicitors received the tenant’s bank guarantee.
8. The landlord’s solicitors advised the tenant’s solicitors that the landlord would be proceeding to execute the documents as soon as possible once lockdown was lifted, and copies would then be provided.
9. Before the landlord executed the documents, the tenant’s solicitor advised the landlord’s solicitor that, “… We note no binding agreement exists between our clients … We are now instructed that our client withdraws and terminates the negotiations between our respective clients …” .

The landlord disputed the tenant’s right to withdraw from the proposed lease.

Decision

The landlord asserted that the tenant’s delivery of the deeds to the landlord’s solicitors meant they were bound by them.

A lease is a deed and delivery is essential before a deed becomes binding.  

Accordingly, consideration was given as to when a deed is delivered and becomes binding. Darke J referred to a previous case:

“ … As I stated in Realm Resources Ltd v Aurora Place Investments Pty Ltd (2019) BPR 39,235; [2019] NSWSC 379 at [70]:

It is not necessary, for delivery of a deed, that there be a physical delivery of the executed instrument.  Equally, a physical delivery of an executed deed does not necessarily amount to a delivery.  In this context, delivery depends upon the intention of the executing party …”. ¹

Darke J considered relevant principles, including that the intention is to be ascertained objectively, by reference to the words and conduct of the executing party and the circumstances surrounding the execution of the deed:

1. where the relevant intention is found to exist, the executing party is taken to have delivered the deed and thereby become bound by it, such that the deed cannot be recalled; and
2. in some cases, the requisite intention is found to be lacking because the parties have conducted themselves on the basis that they would not be bound until all parties are bound.

Darke J held that the intention was only to become bound by the deeds once they were signed by the landlord. In the meantime, both parties had the right to withdraw from the transaction. The tenant was entitled to withdraw from the transaction as it did.

In his determination, in respect of the Heads of Agreement, Darke J stated that:

“… Importantly, and as emphasised by the [tenant] in submissions, it was stated that either party could withdraw at any time prior to execution of formal legal documents “by both the Lessee and the Lessor”. I agree with the submission of the [tenant] that those words mean what they say, so it is a statement that there is a right to withdraw until the formal lease documents have been executed by both parties …”. ² 

Timely reminder

This case is a timely reminder of the importance of: 

• establishing the intention of the parties before they enter into a heads of agreement to lease premises; and 
• ensuring that documents are fully executed by the parties at the earliest possible time, or run the risk that either party may withdraw, if that is what the agreement between the parties says they can do.

If you would like further information or leasing advice, please contact our Commercial Property team. 

Footnotes

¹ [para 44]

² [para 56]