Heads of Agreement

The Supreme Court of Victoria has confirmed in Casdar Pty Ltd v Joseph Fanous [2017] VSC 616 that a Heads of Agreement signed by a Landlord and Tenant followed by post contractual conduct will not always immediately bind the parties.

Casdar Pty Ltd (Landlord) appealed a decision from the Victorian Civil and Administrative Tribunal (VCAT) (Casdar Pty Ltd v Fanous (Building and Property) [2017] VCAT 1464). The Landlord sought a number of orders, including Joseph Fanous (Tenant) to pay rent of $93,800 and interest of $8,539.71 to the Landlord.

Key facts

The Landlord (who was the freehold owner of the premises) and the Tenant executed the Heads of Agreement on 29 July 2015 (the Heads). The Tenant obtained finance approval, paid the first month’s rent on or about 28 August 2015 and collected the keys to the premises, but never took physical possession.

After the Heads had been executed but without a formal lease being entered into, the Landlord continued with building works at the premises. The Tenant submitted that the building works were not done specifically for the Tenant, but instead consisted of general completion works and shop fixtures at the premises. The Landlord submitted that no Landlord would substantially modify the premises if a tenant who was in occupation from month to month under a periodic lease had requested the building works.

The parties began negotiating a formal lease on or around 4 August 2015, with the Tenant being provided at that time with a disclosure statement under the Retail Leases Act 2003 (Vic) (RLA). These negotiations broke down due to a number of factors, including the quality of the building works, and a lack of permit for the premises (permit was provided for in the Heads). A formal lease was never entered into. In a letter to the Landlord’s solicitor dated 19 November 2015, the Tenant’s solicitor stated that at that point in time, they did not consider the Tenant to be bound by the Heads. They required that the Heads be revoked and requested a Deed of Settlement and Release to be executed by all parties to terminate the Heads.

Key issue

The critical question before the Supreme Court was whether the Heads constituted an agreement for lease which the parties intended to be immediately bound by.

Supreme Court findings

In delivering its findings, the Supreme Court reiterated that merely labelling a document as a Heads of Agreement does not mean that it is an agreement for lease, which immediately binds the parties. The Court cited the leading authority of Masters v Cameron (1954) 91 CLR 353 and stated that regardless of the category that this case would fall into, the most important consideration in determining whether the Heads was binding was the intention of the parties.

In order to determine the parties’ intentions, the process itself does not involve ‘formulaic prescriptive rules‘ but instead ‘regard must be had to any written agreements between the parties and the pre and post contractual conduct of the parties‘, that is, what a reasonable person would infer or deduce from observing the totality of dealings between the parties.

With reference to pre-contractual conduct, it was noted that the Landlord did not provide a copy of a lease or a disclosure statement at the time of negotiating the Heads.

As the works at the premises were deemed to consist of general completion works and shop fixtures, as well as the Landlord not complying with a number of obligations under the RLA, it was held that the pre and post contractual conduct of the parties was consistent with the Tenant’s position, that the parties did not intend to be bound by the Heads. If the Landlord intended to be bound by the Heads, the disclosure statement would have been provided to the Tenant and the term of the lease would have complied with the RLA, in order to produce an agreement for lease which was immediately binding on the parties.

The Court dismissed the Landlord’s repeated argument that there was a binding agreement between the parties by virtue of the parties’ conduct which demonstrated an understanding or belief that the parties were obliged to comply with the Heads.

Practical Considerations

This case highlights a difficult area of law for parties wishing to rely on an offer to lease, letter of offer or heads of agreement to bind parties. It is clear that the intention of the parties is the most important consideration and that the courts will look to both pre and post contractual conduct when considering the parties’ intentions.

The problem remains that this is all very subjective and no clear cut answer can be provided. It can leave parties unsure as to whether a binding agreement is in place.

Our practical advice is to start from the position that all offers to lease, letters of offer or heads of agreement are non-binding and to expressly state the same in the documentation. An exception to this rule can be made where an offer to lease, letter of offer or heads of agreement is very detailed, covers all contentious terms and conditions, attaches all relevant plans, is expressly stated to be binding, and the parties act consistently with a binding agreement being in place. For leases where the RLA applies, the offer to lease, letter of offer or heads of agreement should be accompanied by a copy of the lease and the disclosure statement.

Authored by:
Lui Scipioni, Partner
Cassandra Krylov, Lawyer