When exactly are parties said to reach a binding contract during negotiations? This is a question that frequently arises during negotiations between landlord and tenant, particularly where one party makes an offer or proposal, but significant terms remain unresolved. The NSW Court of Appeal case, OXS Pty Ltd v Sydney Harbour Foreshore Authority provides some clarity around this question.
The appellant, OXS was the tenant of premises at the rocks and the defendant, Sydney Harbour Foreshore Authority (SHFA) was the owner and lessor. Before the lease was due to expire, OXS requested a 7-year extension to the lease. SHFA sent a letter to OXS stating they were ‘prepared to offer a new 10-year lease commencing on 1 July 2011 on commercial terms at the prevailing market rate’, subject to OXS fulfilling certain conditions. These included OXS lodging a development application. OXS responded promptly, purportedly ‘accepting’ the ‘offer’. SFHA received advice that its letter was a proposal, not a binding agreement and withdrew its ‘offer’ in writing. 2 years later, SHFA informed OXS that the current lease would not be renewed and would expire as scheduled.
The trial judge found that no agreement for an extended lease had arisen between the parties. This was because:
- The letter was not an offer capable of acceptance because it was merely an indication of SFHA’s preparedness to grant a lease if certain conditions were met; and
- The terms of the purported agreement lacked certainty. Particularly due to the fact SFHA did not specify what the ‘commercial terms’ referred to in the letter were.
NSW Court of Appeal Decision
OXS appealed to the NSW Court of Appeal. One ground on which they appealed was that there was a concluded agreement for the lease.
Both parties considered the case of Masters v Cameron, which noted that there were classes of arrangements that may exist in negotiations. These include where:
- The parties had reached a final agreement on the terms of their contract and agreed to be bound immediately by it but wished to restate those terms in a fuller or more precise way in a formal document.
- The parties were bound immediately and exclusively by the agreed terms, while expecting to make a further contract in substitution for the first contract, containing additional terms.
- The parties decided there was not to be a concluded contract unless and until a formal document was executed.
OXS contended the letter fell into the category of 1 or 2. SFHA submitted the letter fell into category 3. The court accepted SFHA’s argument, stating it was unlikely that the parties intended to bind themselves by an informal consensus. The parties still needed to conduct negotiations regarding the major items in the lease agreement.
The judges also stated that alternatively, even if the parties had intended to be immediately bound, the purported agreement would be void for uncertainty because the parties had not reached any agreement about such essential terms such as the rent to be paid, rent review provisions and the ‘commercial terms’ discussed above.
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DISCLAIMER: The information contained in this article is general and is not intended to be advice on any matter. It is for information only and is not legal advice. In the event of a legal problem, you should seek legal advice.