Is an agreement to lease binding?

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An important case to decide whether a Letter of Intention to Lease was a binding legal document was heard in the Brisbane District Court on 30 April 2012.

The key consideration was whether the letter was a binding legal document or simply an application to lease to enable the Landlord to assess the Tenant’s “lease-worthy capacity”. The tenant argued that the letter was not binding.

This issue arises frequently in leasing and cuts to the core of the basis tenets of contract law. DCJ Koppenol’s approach was summarised at paragraph 9 of his judgement:

“In determining this situation, the decisive issue is the intention of the parties, as objectively ascertained from the terms of the document, when read in light of the surrounding circumstances.”

 In order to establish intention, two primary elements were considered:

  1. Whether the letter provided for all of the principal terms of the agreement between the parties; and
  2. Whether the letter used the language associated with a binding agreement.

The Judge was satisfied that these elements were satisfied in this case, and found in favour of the Landlord.

So what are the implications for parties entering into an Agreement to Lease?

  1. Your agreement should contain all essential terms of the lease including the property, landlord and tenant, lease period, options to renew, obligation to pay outgoings, mechanics of payment, etc.
  2. Secondly, your agreement needs to make it clear that the parties intend to be bound by its provisions. In this case, the following words were found to be sufficient:

“If the above summary correctly reflects your understanding of an agreement made in discussion with the lessor, please sign where indicated and pay the deposit… the Lessor’s solicitor will then prepare a lease the incorporates the terms herein together with usual terms applicable to a lease of this type and submit this to you”.

The tenant lost and was ordered to pay damages of $113,317.87 – a significant price to pay for not obtaining legal advice in relation to a particularly complex area of law.

For advice in relation to any of your leasing enquiries, please do not hesitate to contact me.

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