Landlord and Tenant alert: Deed of Agreement for Lease Fails- 400 George St (Qld) Pty Limited v BG International Limited [2010] QCA245

Specifically, the decision highlights the need to be aware of the significance of a ‘subject to contract’ regime in formally documenting a ‘heads of agreement’ and the differences between documenting a concluded agreement in the form of a deed as opposed to an agreement.

Factual background

The appellants (400 George Street) were the registered owners and developers of land in Brisbane on which an office building was to be constructed.  In April 2008, heads of agreement were reached with the respondent (BG International) for the grant of a lease of four floors on completion of the construction of the building.  The heads of agreement contained a special condition which stated ‘No legally binding agreement is made by the parties’ execution of this letter.  All documentation is subject to a mutually agreed legal document by both parties’.

After negotiations which took some five months, the solicitors for 400 George Street sent to the solicitors for BG International execution copies of a document described as an ‘Agreement for Lease’ and a document described as a ‘Lease’.  These documents were executed by BG International’s attorney and returned to 400 George Street’s solicitors for execution by 400 George Street in early October 2008.  Some six weeks later before the documents had been executed by 400 George Street, BG International’s solicitors wrote to 400 George withdrawing its ‘offer’ to enter into the agreement for the lease of the four floors.

Earlier proceedings

400 George Street maintained that BG International was contractually bound and commenced proceedings in the Supreme Court to enforce its claim. 

Before McMurdo J, 400 George Street’s claim was that BG International was contractually bound on the basis that the ‘Agreement for Lease’ had been executed by it as a deed and delivered unconditionally to 400 George Street.  The legal position with a deed as opposed to an agreement under hand is that a deed that is signed, sealed and delivered by a party as such is binding on that party and cannot be recalled.  The landlord relied on the fact that the ‘Agreement for Lease’ had been ‘executed as a deed’ by BG International’s attorney who had’ signed, sealed and delivered’ the ‘Agreement for Lease’ on behalf of BG International. 

However, the trial judge held that the references on the execution pages of the ‘Agreement for Lease’ to a deed and to sealing and delivery of the document were mere surplusage that did not represent BG International’s true intention which was not to be bound until the ‘Agreement for Lease’ had been signed by all parties.  Accordingly, BG International was not contractually bound and was free to withdraw from the agreement at the stage it did.  In reaching this conclusion, McMurdo J gave greater weight to a number of other features in the documentation, the transaction and the manner in which it had been negotiated.

The Court of Appeal

1. Was the ‘Agreement for Lease’ a deed?

 

2. If the ‘Agreement for Lease’ was a deed, was it delivered when forwarded to the solicitors for 400 George Street so that BG International was immediately bound or was the ‘Agreement for Lease’ to become binding only when the other parties executed it?  

On the first question, the Court held that the references in the execution pages to ‘Executed as a deed’, ‘Signed, sealed and delivered’ and ‘By executing this deed’ were not mere surplusage and, instead, unambiguously informed the parties and anyone reading the ‘Agreement for Lease’ that the instrument was intended by BG International to be a deed.

On the second question, the Court held that the ‘Agreement for Lease’ had not been delivered.  The Court emphasised the ‘subject to contract’ regime in which the parties conducted their negotiations and reasoned that delivery could not occur until the ‘Agreement for Lease’ was executed by all of the parties to the agreement. 

Points to note

1. It is a common practice amongst landowners to structure their heads of agreement for property transactions so that they are not binding until satisfactory legal documentation has been entered into by the parties.  In those circumstances, landowners need to be aware of the risk that the other party may withdraw from the transaction whether or not the documentation is in the form of an agreement under hand or has been ‘dressed up’ as a deed if documents are not promptly executed on behalf of the landowners. 
2. Care should be taken when inserting a ‘subject to contract’ regime in heads of agreement.  Difficulties can arise in drafting a ‘subject to contract’ regime that permits a landowner to enforce an agreement in writing in the form of a deed while reserving for itself the right not to proceed. 
3. One way of avoiding the pitfalls in the case discussed is to exchange counterparts of the documents so that the parties are immediately bound on exchange.  However, it may not always be practical or convenient to do this.  
4. Finally, there may be arguments based on the other party’s conduct that would enable a landowner to enforce an agreement against the other party in similar circumstances.  For example, if BG International had by its conduct represented to 400 George Street that it considered the ‘Agreement for Lease’ binding on it, BG International may have been estopped from setting up the ‘subject to contract’ regime as defence to 400 George Street’s claim.  Similarly, there may be acts of part performance justifying a declaration that an instrument executed in similar circumstances was binding.  

If you have any questions regarding this case or agreements to lease in general, please feel free to contact the DibbsBarker Leasing Team Leader: