General Negotiation Tips

When is an agreement for lease binding?

In relation to a lease, for there to be a binding contract there must be an agreement between the parties on all the essential terms of the lease which include:

• the commencement date;
• the length of the term;
• the number of options (if any); and
• the amount of rent payable.

NOTE In some instances, there will be a binding contract, regardless of whether or not a formal document is ever signed.(1)

Practical tips for Landlords/ Tenants

If you do not want to be bound then use the words to the effect of:

“The parties agree that there will be no binding agreement until the execution of the lease/contract by both parties”

The above words should be noted at the beginning and throughout the negotiations, in particular where there are substantial variations to the original proposal.

Furthermore, a tenant should not take possession of the premises and pay rent (or, if a landlord, let a tenant do so) until the lease is signed to avoid acceptance by conduct!

Can negotiations through e-mail correspondences be binding?

The court has established that an email exchange between a tenant and a landlord’s agent amounted to an immediately binding agreement for a lease and a licence; despite the fact that:

• After the relevant exchange of emails, the parties continued negotiations as to the terms of the lease; and
• No formal lease or licence documents were ultimately agreed upon or signed by the parties.(2)

Caution must be taken when communicating with the other party as to the nature of the communications. The court will examine all communications between parties to a transaction and make an objective assessment as to whether and when they intended to be legally bound.

Practical tips for Landlords/ Tenants

If you do not wish for communications to be binding, then that should be clearly communicated at the beginning (and throughout negotiations), including noting that any negotiations regarding the agreement are subject to an execution of a formal written document by all parties. Refer to our suggested wording to use earlier in this article.

Be careful of your conduct and what you say!

Parties must be mindful of the statements they make during negotiations in order to avoid misleading the other party about their own rights in the negotiation. In the absence of a binding agreement, the legal principle of “estoppel” can sometimes step in to create rights based on the action that one party takes in response to a representation made by the other, inducing that party to act to its detriment.(3)

Building repair and maintenance

The landlord is generally responsible for repairing and maintaining major structural aspects of the building including the roof and the building systems contained in it such as common areas and lifts, although in many instances the landlord makes no mention of this in the lease.

Items such as air–conditioning, fixtures and wall partitioning should be carefully defined in the lease to avoid costs and disagreements as commercial leases are often silent on items such as air- conditioning and cool-rooms which are capital items but used by a tenant in their day-to-day business.

Practical tips for Landlords

Be aware of any landlord’s covenants under the lease. Caution should be taken when agreeing to maintain building services and the landlord should be given a reasonable time to restore such services should they become unavailable due to break downs or acts out of the control of the landlord (e.g. due to power failures)

Practical tips for Tenants

Be proactive with the landlord’s covenants. For example, if the air-conditioning servicing the premises or the overall building condition is aged, negotiate covenants into the lease which provide that the landlord must look after the building services, including all maintenance and replacement of parts, and keep the building in a structural, tenantable and watertight condition.

General Leasing Tips

Exercise of options under leases

An option is a term in a lease that allows a tenant to renew their occupation of a premises before their tenancy comes to an end. There is usually a specific period to exercise the option. The tenant has no obligation to renew the lease and the landlord does not have the right to deny the tenant from exercising their option unless there is an invalid exercise of the option or, in certain circumstances, a breach of the lease.(4)

Practical tips for Tenants

This applies to both retail and commercial leases.

Check the option provisions in the lease and note the critical dates.

Make sure the option is properly exercised (within the prescribed timeframe under the lease) and valid service has been given to the landlord (i.e. check the notice provisions in the lease). Typically, a valid service of notice is given by post or in person to the registered business address of the Landlord.

An option being exercised by email may not be considered valid service if there are no provisions under the lease to allow notices being given by email.

NOTE Exercising an option too early or too late may deny the tenant that option.

Registration of leases

In Queensland, a lease for a term of more than three years is considered a long term lease and as such, must be registered in order for the lessee to receive certain statutory protections. Conversely, a lessee who enters into a lease being for a term of three years or less is automatically granted a legal and indefeasible interest in the premises which makes registration unnecessary in these circumstances.(5)

Tenants

The benefit of registering your long term lease is that your interest will be protected in instances where the property is sold or legally affected in any other way. For example, should a leased premises come under contract, any potential buyer will be required to purchase the property subject to a lease that is registered on title to the property.

NOTE where there is a mortgage on title, the tenant should ensure that the landlord obtains the mortgagee’s consent to the lease regardless if the lease is being registered or not, so the lease is enforceable against the mortgagee.

Landlords

Registering a lease on the title may serve to add value to the property, as generally, any potential purchasers will look favourably on buying a commercial property that is already tenanted and they can see the leases registered on title. Further, registration of a lease may look favourable to a landlord’s financier. Should a landlord request to increase their facility limit, a registered lease on title could potentially provide the financier with an added layer of security.

NOTE where there is a mortgage on title, the landlord should ensure that the mortgagee’s consent to the lease is obtained as it is typically a standard term of their mortgage.

The content of this article is intended to provide a general guide to the subject matter of commercial leasing and does not constitute as legal advice.

(1). Masters v Cameron (1954) 91 CLR 353.

(2). Vantage Systems Pty Ltd v Priolo Corporations Pty Ltd [2015] WASC 21.

(3). Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387.

(4). It is common for leases to say that if at the time the tenant’s notice of exercise of option is served the tenant is in breach of the lease, the landlord may refuse the further term. Section 128 of the Property Law Act 1974 (Qld) prescribes that the landlord must serve a prescribed notice on the tenant within 14 days of the date of receiving the tenant’s notice of exercise of option. The tenant then has one month to seek an order from a court to allow the option, despite the tenant’s breach. A landlord’s failure to comply with section 128 of the Property Law Act 1974 (Qld) could result in the landlord having to grant a new lease for the further term despite the tenant’s breach.

(5). s185 Land Title Act 1994 (Qld).