Landlords and Tenants: At what stage do lease documents become binding?

Published: 29 November 2021

Written by: Duane Keighran and Sara Ibrahim

The case of Thorn Australia Pty Ltd v Centuria Property Funds Ltd [2021] NSWSC 1217 considers whether provisions of a signed lease and incentive deed which were signed by the tenant and delivered to the landlord could amount to the tenant (Thorn) being immediately bound by the deeds. Due to Covid-19 lockdown restrictions, the landlord (Centuria) was unable to complete execution of the documents in a timely manner after the tenant had delivered its signed copies. It was during this period of inaction by the landlord that Thorn withdrew from the transaction. Thorn contended that it did not intend to be immediately bound on delivery of the signed deeds.

How did this issue arise?

In April 2021, both parties had entered into a heads of agreement which was prepared by Centuria (as landlord). Within the heads of the agreement, the following relevant provisions were set out:

“The information contained in this proposal is not a binding lease between the prospective Lessee and the Lessor and is subject to final Lessor and Lessee board approval.
The Lessee and the Lessor reserve the right to withdraw from and terminate negotiations at any time prior to execution of formal Lease documents by both the Lessee and the Lessor. The Lessor’s rights in respect of the deposit and legal costs remain irrespective of approval.”
In early May the draft transaction documents (comprising an incentive deed and a lease) were sent to Thorn’s lawyers. Following negotiations between the parties, Thorn signed the incentive deed and lease. The next day, Thorn’s lawyers again sent two signed copies of the lease and one signed copy of the incentive deed. Attached with the signed documents was a cover letter which referred to “formalising the arrangements”. Under this agreement, Thorn proposed arrangements which would include Centuria sending Thorn a scanned copy of the documents signed by Centura as landlord, and if the tenant was satisfied at that point, they would authorise Centuria to exchange and date the incentive deed and date the lease.

Centuria did not agree to these conditions. Following subsequent discussion, the parties agreed that Centuria would arrange execution of both counterparts and then would arrange registration of the lease, and upon completion, documents would be sent to Thorn. This meant there would be no exchange of counterparts.

As requested by Centuria, Thorn provided another signed incentive deed, attached with the required bank guarantee provided as security for Thorn’s obligations under the lease and incentive deed. However, Centuria could not promptly proceed with its execution due to COVID-19 lockdown restrictions. Consequently, Thorn decided to withdraw.

Centuria argued against Thorn’s withdrawal, stating they were bound by the terms of the lease and incentive deed as signed and delivered by Thorn.

What did the court decide?

The critical question for the Court to decide was to determine was whether the tenant had displayed an intention to be bound immediately on execution and delivery of the deeds.

Presiding Judge, Darke J determined Thorn did not intend to be immediately bound on delivery of the deeds. Darke reached this conclusion for various reasons. Most importantly, he noted:

Under the heads of agreement, both parties had a specific right to leave the negotiations at any time until any formal documents had been signed.
An intention for Thorn to be immediately bound was not evidenced by simply signing the deeds and sending them electronically prior to the submission of the original signed documents.
When Thorn had submitted the original documents with only one signed copy of the incentive deed it was believed that Thorn was intending that the exchange of the incentive deed would be the first act giving rise to legal rights and obligations. Thorn did not intend to become bound by the Lease (even conditionally) before being bound by the Incentive Deed. In addition, the submission of a second incentive deed was merely procedural and did not manifest this intention to be bound.
This case follows a similar judgement to the case of Pittmore Pty Ltd v Chan [2020] NSWCA 344, and also reconsiders principles found in Realm Resources v Aurora Place Investments [2019] NSSWC 379. Where an intention to be bound exists, a party will be bound by the deeds on delivery. This will be the case regardless of whether a deed is delivered unconditionally or delivered to be held in escrow.

Key point to note

Ultimately, physical delivery of signed deeds does not alone evidence an intention to be immediately bound. The words, conduct and facts surrounding the execution are required to be examined to ascertain a party’s intention.

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