The failure to clearly specify when a lease was intended to become binding has resulted in a 6 day court argument over whether a signed “Heads of Agreement” could be enforced against a defaulting tenant when it envisaged a subsequent formal lease that never eventuated.
Coastal Haulage entered into the written arrangement – call it a Letter of Intent, Agreement for Lease or Heads of Agreement: they mean the same thing – for the 4 year occupation of industrial truck washing premises at 44a Shettleston Street Rocklea in April 2011.
Coastal had been occupying an adjoining site – both owned by Truckstop P/L – for the prior 8 month-to-month periods but sought more space.
The LOI signed by Coastal director Anthony Boyce specified that the parties would enter into a formal lease to more fully express the agreed terms and would include in addition, “the normal terms and conditions applying to leases of similar buildings in the Brisbane area and subject to the approval of the lessor and lessee and their respective legal advices”.
It also specified that Boyce would sign a personal guarantee.
The lease and guarantees were prepared but were never signed. Truckstop re-entered into possession five months into the term and then sued the tenant and Boyce personally for loss of rent for the entire 4 year period plus the cost of premises rectification.
The suit was defended by the tenant on the basis that the inducement works agreed to be performed by Truckstop to a value of $120,000 – construction of a loading dock pit, elevating a concrete floor, replacing grates, the make good of a former tenant’s industrial washing equipment and items that had not even been precisely agreed – had not been satisfactorily completed.
Each of the alleged works deficiencies was given short shrift by the court, either because of the insubstantial nature of the complaint or as a result of the landlord’s evidence being preferred.
Coastal also asserted that the LOI did not constitute a concluded agreement as the formal document proffered by the landlord’s solicitors never gained its approval or that of its solicitor as required.
As to the proper construction of the LOI, the court noted that such terms of negotiation can have three potential interpretations: a binding agreement that contains all the terms of the bargain; one where the parties propose to have the terms restated in a more extensive and precise form but nevertheless intend to become immediately bound; or one whereby the parties have no intention to be bound unless and until they execute a formal contract.
On this occasion, thought the court, the terms of the LOI were sufficiently precise and the objective facts – especially in relation to payment of the rental deposit immediately upon the tenant entering into occupation – were sufficiently supportive to conclude that the agreement was to take effect immediately upon the tenant entering into occupation.
Entry into occupation by Coastal was, so held the court, clear evidence of the company’s intention to be bound by the agreement at least by that time. Payments for rent and electricity as well as the submission of invoices to Truckstop for payment further supported such inference.
The absence of an agreed allocation of the landlord’s $120,000 improvement inducement – which merely provided “a mechanism for choices that could be made regarding the manner in which that money could be ultimately spent” – was no obstacle to this conclusion.
Coastal and Boyce were self-represented in the contest.
The judgment reveals no argument of whether the purported incorporation into a formal lease via an LOI of “normal terms and conditions applying to leases of some similar buildings in the Brisbane area” of itself was sufficiently certain.
Neither was there any suggestion of Coastal taking the opportunity to cavil with any of the intricacies of the formal lease when it was presented. Indeed had it done so, it may have been able to establish that “normal terms and conditions” is a somewhat subjective notion.
The landlord succeeded in recovering rent for the entire term until April 2015 of nearly $500,000 – although the judgment does not refer to any evidence relating to attempts to relet – as well as the cost of reinstating repairing and cleaning.
That’s where Truckstop’s good fortune ran out. Its case against the guarantor failed in two respects firstly because the LOI – an agreement between the tenant and the landlord – merely specified that Boyce as director would provide one. That Mr Boyce signed the LOI on behalf of the company was no help.
Likewise, Truckstop’s claim against Boyce for “misleading and deceptive conduct” failed in the absence of a proven intention not to perform the lease and guarantee obligations as at the date of execution of the LOI.
Regardless of your preference, an LOI document should always be crystal clear one way or the other – binding immediately on the one hand or not binding until formal lease is signed on the other – so that unnecessary disputation can, where possible, be avoided.