Posted on October 17, 2021 by
NSW Supreme Court considers when executed lease documents are binding
A recent case in the NSW Supreme Court highlights the complexity and need for diligence and caution regarding the execution and exchange of deeds, particularly in the context of property matters in general.
Thorn Australia Pty Ltd v Centuria Property Funds Ltd  NSWSC 1217 involved questions regarding whether a prospective lessee who signed and delivered deeds to a lessor was bound by those deeds. In this instance, despite delivering executed deeds, providing a bank guarantee and making subsequent payments and arrangements regarding access, the lessee was held not to have objectively manifested an intention to be immediately bound by the deeds.
Accordingly, prior to execution of the deeds by the lessor, the lessee was not bound and was free to withdraw from the transaction.
Background to the Proceedings
The parties entered into a Heads of Agreement which included a statement that it did not constitute a binding lease between the parties and both parties reserved the right to withdraw from negotiations at any time prior to execution of formal lease documentation.
The lessee signed a lease (expressed to be a deed) and an incentive deed (together the deeds). Soft copies of those deeds were emailed (by an agent of the lessee) directly to the lessor.
The lessee’s solicitors subsequently couriered original versions of the signed deeds to the lessor’s solicitors.
The cover letter enclosing the signed deeds (30 June Letter) set out a “procedure” for execution and return of the deeds by the lessor. Importantly, the procedure required that the lessor’s solicitor send scanned copies of the deeds (executed by the lessor) to the lessee’s solicitor for perusal and approval, prior to exchange of the deeds. The lessee expressly did not authorise exchange of the deeds until the lessee gave its written authorisation to do so.
The lessor’s solicitor proposed a “Document Return Checklist”, which described a different procedure. Duplicates of the deeds, signed by the lessee were to be delivered to the lessor’s solicitor, who would then arrange execution, exchange, registration and return of a (single) completely executed counterpart.
The parties were at cross purposes as to the process of execution and exchange of the deeds, however the lessee’s solicitor did refer in subsequent correspondence to the 30 June Letter and that the lessee required that its procedure be followed.
Various emails and intermediate discussions occurred in the meantime between the parties and their agents regarding obtaining access to the premises, quotes for refurbishment works and provision of the required bank guarantee.
The lessee sought to withdraw from the negotiations.
The lessee’s solicitor wrote to the lessor’s solicitor noting that no binding agreement existed between the parties and the lessee withdrew from and terminated the negotiations, effective immediately.
Following this, the lessor’s solicitor sent soft copies of the deeds, signed by the lessor, to the lessee’s solicitors (the deeds had not been signed by the date the lessee communicated it wished to withdraw).
The lessee commenced proceedings in the Supreme Court seeking declaratory relief that the deeds were not binding.
Amongst other things, the case revolved around whether the lessee, by signing and delivering the deeds to the lessor, was bound by the deeds. Specifically, whether the reservations in the 30 June Letter and the Heads of Agreement were enough, in light of the factual circumstances, to ensure the deeds were not binding.
In the circumstances, the Court found that the lessee had not objectively manifested an intention to be immediately bound by the deeds and the reservations in the 30 June Letter (together with the statement of intention in the Heads of Agreement) entitled the lessee to withdraw at any time prior to execution and exchange of the deeds.
Delivery is essential before a deed becomes binding: Pittmore Pty Ltd v Chan (2020) 104 NSWLR 62;  NSWCA 344 at .
Where there is ambiguity in the status of a deed, the critical question is whether the party delivering the executed deed has evinced an intention to be bound immediately: Segboer v AJ Richardson Properties Pty Ltd (2012) 16 BPR 31,235;  NSWCA 253 per Sackville AJA (with whom Allsop P and Campbell JA agreed) at . See also 400 George Street (Qld) Pty Ltd v BG International Ltd  2 Qd R 302;  QCA 245.
The intention is to be ascertained objectively, by reference to the words and conduct of the executing party and the circumstances surrounding the execution and delivery of the deed: Segboer v AJ Richardson Properties Pty Ltd (2012) 16 BPR 31,235;  NSWCA 253 at - and ; Taouk v Ho  NSWCA 156 at .
Where the relevant intention is found to exist, delivery of the deed is taken to have been effected and the executing party bound the deed: Realm Resources Ltd v Aurora Place Investments Pty Ltd (2019) BPR 39,235;  NSWSC 379 at .
The Court found firstly, that the Heads of Agreement may or may not give rise to immediately binding legal rights or obligations. However, even if not binding, the subsequent words and conduct of the parties should be considered in light of the statements of principle (in this case the right to withdraw) in the Heads of Agreement.
In this instance, the lessee’s conduct was viewed in the context of the dealings between the parties which included both the statement in the Heads of Agreement that either party could withdraw at any time prior to execution of formal legal documents by both parties and the statements in the 30 June Letter.
The Court held that the emailing of the soft copies of the deeds did not objectively evince an intention on the part of the lessee to be immediately bound by the deeds it had signed in light of the Heads of Agreement and the communications between the solicitors about how the executed documents would be dealt with.
In the Court’s opinion, the lessee’s conduct did not evince an intention to be immediately bound by the deeds it had signed. Further, in circumstances where the right to withdraw from the negotiations had not been abrogated or abandoned, the parties reserved to themselves the right to withdraw until such time as formal lease documents were executed and exchanged.
Matters to consider
In our view, a number of factual circumstances, altered only slightly, may well have resulted in a different outcome in this instance.
This decision highlights the need for extreme diligence and caution in the conduct of property law related matters, in particular the process of execution, delivery and exchange of deeds.
Lessees and lessors should review their processes for delivery and exchange of lease documentation.
A copy of the judgment can be found here.
If you wish to discuss anything in this blog, please leave a comment below or contact Frances Tse on 02 8235 9711.