The Facts
Lease due to expire and negotiations for a new lease begin
A case heard in the Court of Appeal of the Supreme Court of Western Australia concerned a dispute between a landlord and a tenant of commercial premises in Perth over whether their email exchange constituted a binding contract.
The tenant had occupied the premises for six years and its lease was due to expire on 30 June 2009. In May 2009, the parties began negotiations for a new lease.
Proposals sent and email negotiations ensue
An initial proposed lease was rejected by the tenant. On 4 June 2009 the landlord’s agent sent an email to the tenant attaching a revised proposal. The email stated: “Can you please confirm in writing that this proposal is acceptable to [the tenant] and we will arrange for [the landlord’s] solicitors to prepare the draft documentation”.
Various emails were then exchanged. Ultimately the tenant confirmed by email on 10 June 2009 that it was “happy with the terms of the proposal” and asked that the agent “[p]lease proceed to wrap this up”.
Formal documents prepared but tenant slow to review
The agent instructed the landlord’s solicitors to prepare a draft of the formal lease documents.
These were subsequently sent to the tenant on 2 July 2009. In preparing the documents, the solicitors had noticed an error in the revised proposal regarding the licence fee for six car bays included with the lease and had corrected it. Also, unlike the original lease, the new draft lease contained no options to renew.
By this time the original lease had expired, but the tenant continued to occupy the premises.
After a long delay, the tenant replied on 8 September 2009 that it was not happy with the “make good” clause contained in the draft lease. The tenant suggested an alternative clause, which was rejected by the landlord.
Tenant announces intention to vacate premises and landlord sues
A short time later, the tenant wrote to the agent stating that since no concluded agreement on the new lease had been reached, since 30 June their occupation of the premises had continued based on the holding over clause in the original lease, and they were giving notice in accordance with that clause that they would vacate the premises in one month.
The landlord brought a claim for damages against the tenant.
It was up to the court to determine whether, by the exchange of emails, the parties had intended to create a legally binding relationship even though formal documents had not yet been agreed.
Expert commentary on the court's decision
What was the intent of the parties?
In the case Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd [2015] WASCA 21, the court had to determine the intentions of the landlord, Priolo Corporation, and the tenant, Vantage Systems, at the time they exchanged emails about the revised proposal.
As stated by Buss JA: “The relevant intention is intention to contract, and not what the parties intended by the terms of the alleged concluded and binding agreement.”
Identifying intent of the parties requires an objective assessment
His Honour set out the relevant legal principles, as articulated by the High Court in Masters v Cameron (1954) 91 CLR 353 and developed in subsequent case law, including that:
The facts and circumstances of each case are different
In relation to the facts and circumstances of this case, the court found that:
Court finds landlord and tenant intended to contract
Ultimately the court determined that, on an objective assessment, and after having regard to all relevant facts and circumstances, both Priolo and Vantage were willing to and did bind themselves to a new lease on the terms set out in the revised proposal.
The subsequent negotiations, dealings and communications between the parties did not destroy the earlier concluded and binding agreement between them.
How can you avoid this result when negotiating a deal or transaction?
This case provides a caution about the dangers of email negotiations. While emails are often considered a casual and informal form of communication, that doesn’t mean they can’t create legal relationships.
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.
If you don’t intend to enter into a binding contract until formal documents are executed, you should state that clearly from the outset and reiterate it throughout any negotiations.