The letter of intent for the lease of a commercial building in Arthur Street’s art gallery precinct lasted barely a week before the tenant suffered a change-of-mind on the three year $100k p.a. deal intended for use as a photography studio.
Arguing that the July 2006 document was a mere lease “application”, wedding and architectural photographer Philip Lennard – who was self represented for last week’s trial – asserted that its purpose was solely to assess his “lease worthy capacity”.
The District Court had to assess the question only too familiar to leasing agents: whether the letter of intent was final & binding on the one hand, or not binding until formal lease was signed, on the other.
The landlord’s agent, Blocksidge & Fergusson, had comprehensively specified all commercial factors and requirements in its four-page heads of agreement letter which concluded:
“If the above summary correctly reflects your understanding of an agreement made with the Lessor and the Lessor’s Agent, please sign where indicated below and pay the deposit…The Lessor’s solicitor will then prepare a lease that incorporates the terms herein together with usual terms applicable to a lease of this type and submit this to you”.
Notwithstanding that the document “did not use the language of a lease application”, Lennard put his faith in the landlord’s insistence – after the lease “offer” had been submitted with verification attached of the required $50,000 bank guarantee from the second defendant’s mother – on a different form of guarantee, namely from the prospective tenants themselves. This, he said, was indicative of a counter-offer, rather than acceptance by the landlord of the document as a binding compact.
The argument would ordinarily have had some merit. But not for our camera man: the bank guarantee was not expressed as a condition precedent to the formation of the lease but rather only as a requirement for entry into possession of the premises.
The agent’s LOI was held binding from the moment it was signed by the landlord and the tenant is liable for the rent as if a formal lease has been fully signed up.
Even in the buoyant rental market at that time, the premises were not re-let until January 2007. Losses in the meantime, including outgoings and re-leasing expenses totalled $113,000. Judgment was awarded on Wednesday in the landlord’s favour for this sum plus interest, a further $37,000.
The letter of intent – which was reproduced in full in the supreme court decision – was very comprehensively crafted. However, containing as it did a provision that “the lessee will provide to the lessor a statement of his assets and liabilities so that lessor may consider granting this lease on a more informed basis”, had the A&L statement not in fact been attached, it may well have been interpreted as a mere “application”.
The document did not unequivocally state – as it could have – that it was intended as a concluded agreement, subject only to documentation on usual terms not inconsistent with those of the LOI.
Regardless, the agent’s LOI well achieved its purpose in this instance but the point that needs to be made is that LOIs can be efficacious even if not intended to be immediately binding.
By this I mean that it is not necessarily the holy grail that the LOI binds the would-be tenant then and there. So doing may cause as many – although different – legal conundrum, because the LOI can not contain all the legal protections and benefits that a landlord expects from a fully documented formal lease. This exposes the landlord to disadvantage at a later time, especially if there is a dispute or termination is envisaged.
So there are in fact, three ways of treating your heads of agreement letter or LOI:-
- binding immediately upon signing, the effect of which is that the LOI contains the only terms that will apply;
- expressed as an agreement, subject only to documentation on usual terms not inconsistent with those of the LOI; or
- being subject to negotiation of final terms, meaning there is not as yet any binding agreement.
Leasing agents usually favour the first option and lawyers, the third.
The agent’s choice should always be a matter of instructions from the landlord. Regardless, it is important that the document be expressed one way or the other in crystal clear fashion – so that interpretation can, where possible, be put beyond dispute.