General Negotiation Tips

Print Friendly, PDF & Email

When is an agreement for lease binding?

It is well established that where parties reach an agreement of a contractual nature and also agree to subsequently draw up a formal contract, the agreement may fall into one of three categories:

  • the parties intend to be bound immediately, though expressing a desire to draw up their agreement in a more formal document at a later stage;
  • the parties intend to be bound immediately but may wish the operation of a particular clause or term to be conditional upon the execution of a more formal document; or
  • the parties do not intend to be bound until they execute a formal contract.

In the first two (2) categories, there will be a binding contract, regardless of whether or not a formal document is ever signed. [1]

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.

Practical Tips For Landlords/Tenants

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

“Subject to formal lease or contract”

OR preferably use the following words:

“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 landlord, let a tenant do so) until the lease is signed.

When is an agreement for lease binding?

The Court has established that an email exchange between a tenant and a landlord’s agent amounted to an immediately binding agreement for 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 it is intended and 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.

What is “without prejudice”?

The term “without prejudice” refers to the legal privilege attached to communication that is specifically used for the purpose of negotiating a settlement or compromise. It restricts any such communication from being relied upon in Court proceedings – in other words, “without prejudice” communications are inadmissible.

The purpose of the “without prejudice” rule is to encourage parties to a dispute to try and reach a settlement by allowing them and their legal advisers to speak freely and make concessions knowing that their words cannot be used against them later in Court if the negotiations fail to achieve a settlement.  However, the protection is not absolute and there are exceptions.

Practical Tips For Landlords/Tenants

If you want a settlement communication to be on a ‘without prejudice’ basis, you should:

  • write the term “without prejudice” clearly at the top of any written correspondence; or
  • state it at the start of any oral communication.

NOTE Phrases such as “off-the-record” and “confidential” are sometimes erroneous and should be avoided. If you are uncertain whether to have communications on a “without prejudice” basis, please contact our office.

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, including that party to act to its detriment.[3]

Practical Tips For Landlords 

It is common for leases to provide a “no waiver by landlord” clause. This will provide that no delay or forbearance by the landlord in exercising any right or remedy under the lease will be a waiver of the landlord’s rights unless expressed in writing by the landlord.

In any case, the use of the words “we reserve our rights under the lease” should be expressed during negotiations of a tenant’s breach under the lease.

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

Lease commencement date subject to landlord fit out works

The tenant should carefully consider a mechanism for the determination of the lease commencement date if the deal includes any sort of condition(s) that require fulfilment prior to the tenant’s occupation of the premises and lease commencement, for example:

  • completion of the premises or building works;
  • completion of tenant’s fit out; and/or
  • the landlord or tenant is required to obtain authority approvals (e.g. approval for the tenant’s intended permitted use) or third party consents.

If the works are extensive, the tenant should request that an agreement for lease or a separate side deed be prepared and should ensure it is clear that the heads of agreement is not a binding agreement of itself. Care should be taken in how you determine the commencement date. Consider whether it is after completion of the landlord’s works or after a defined period of time for the tenant’s fit out.

Practical Tips For Tenants

If the tenant requires early access to the premises prior to the commencement date for their fit out, further time after the completion of the works should be considered when calculating the commencement date. For example, the following words may be included in the heads of agreement as to the commencement date:

“The commencement date will be the date which is the later of the following:

  1. *[insert proposed commencement date]; and
  1. 14 days* from the date of completion of the landlord’s works.”

*vary the number of days as required for the tenant to complete their fit out.

In the above example, if the landlord’s works are not completed by at least 14 days from the proposed commencement date (due to delays or other circumstances), the tenant will maintain the full benefit of the 14 day period to prepare their fit out.

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. The additional term which the option offers is detailed in the initial lease. 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 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.

Make sure the option is exercised within the prescribed time frame under the lease. 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 a legal and indefeasible interest in the leased premises and certain statutory protections. Conversely, a lessee who enters into a short term 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 having indefeasible title means that the tenant’s 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, knowing that the landlord has the benefit of receiving rental payments in accordance with the lease up until its expiry.

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.

Timing of essence for Rent Reviews

The standard types of rent reviews are the following three types:

  • inflation adjustment or consumer price index adjustment on a periodic basis;
  • market rent review to bring the rent up or down to the current market;
  • fixed amount or fixed percentage increases at agreed intervals of time.

It is important for landlords and tenants to ensure that timeframes associated with rent reviews are appropriately diarised, to ensure deadlines are not missed and unnecessary disputes do not arise, particularly in the case of a market rent review.

In a recent case, a landlord had given a notice to the tenant setting out the landlord’s assessment of the current annual market rent for the premises where the rent would increase by 22%. According to the lease, the tenant had 30 days to challenge the notice and provide its own market assessment. The tenant failed to respond within the prescribed timeframe and disputed the new rent. The Court held that time was of the essence under the lease and the tenant’s application to the Court failed and the new rent was determined to be the amount stated in the landlord’s notice. [6]

The content of this article is to provide a general guide to the subject matter of commercial leasing and does not constitute 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] s184 Land Title Act 1994 (Qld).

[6] Sentinel Asset Management Pty Ltd v Primo Moraitis Fresh Pty Ltd [2014] QSC 200.

For further information, please do not hesitate to contact us.

Get the latest news insights and articles straight to your inbox, simply enter your details.

    *

    *

    *

    *Required Fields

    Property

    Amendments to the Retail Shop Leases Act