Case law updates – Subsequent conduct may demonstrate the existence of a new agreement

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In the case of Yangdo Pty Ltd v Equiti Group Pty Ltd (2017) NSWSDC 277, Yangdo (the Landlord) argued that Equiti (the Lessee) incorrectly relied on a letter that allegedly documented a new lease agreement. The Court ultimately held that the document was in fact an agreement for a new lease and, in the alternative, the conduct of both parties subsequent to signing the letter indicated an intention to rely on the terms contained within the letter. Thus, judgment was awarded in favour of the Lessee.

Factual Background

The Landlord, who was the head lessee of a long-term lease, entered into an agreement to sublease Suites 1001-1003 at 56 Station Street, Parramatta to the Lessee between 2007 and 2008. Both parties then entered into discussions to negotiate a new sublease for the suites. On 15 April 2009, the Landlord’s real estate consultant sent a letter to the Lessee containing the terms of a proposed new sublease for the three suites. This letter was signed by the Lessee on 23 April 2009.

Amongst other relevant details, the letter contained several provisions including the lease term, rental amount, outgoings and rent-free period. In 2012, the Lessee sought to terminate the lease of suites 1002 and 1003. The Landlord responded with a claim that the April 2009 letter was not a binding agreement and was simply a terms document. Consequently, the Landlord claimed that it was entitled to the rent that was listed as part of the ‘rent-free’ period.

The relevant question was therefore whether the April 2009 letter could be characterised as a new lease agreement.

The Landlord’s Arguments

The Landlord argued that there was an implied condition precedent in the April 2009 letter indicating that there was no binding contract until a formal lease was executed by both parties. This was argued to be implied for several reasons. Firstly, Section 53 of the Real Property Act provides that a lease for a term exceeding three years is to be executed in an approved form and registered. Secondly, the nine-month rent-free period was one that both parties would have had serious reason to document. Furthermore, the Court in Kastro noted that in a commercial lease it would be “improbable that parties intended to be bounded before the terms of the formal lease were settled by solicitors and exchanged.”

The Relevance of Subsequent Conduct

Nevertheless, the Court ruled in favour of the Lessee. The Lessee highlighted that the letter included the expression “terms agreed for your new lease” along with the requirement for a signature indicating agreement with the stipulated terms and conditions. Furthermore, the existing subleases between both parties were due to expire on 1 May 2009, which increased the likelihood that the parties intended to be bound by the April 2009 letter. The Court accepted that these observations highlighted an objective intention for there to be a binding agreement in the April 2009 letter.

Significantly, however, the Court placed particular emphasis on the subsequent conduct of the parties following the signing of the April 2009 letter. The Court highlighted that subsequent conduct can be considered when determining whether the prior dealings of the parties gave rise to a binding contract. Because the Landlord had charged and accepted new rent in accordance with the April 2009 letter, it amounted to unequivocal conduct that demonstrated an objective intention to be bound by that letter.

Even if the April 2009 letter was not binding in itself, the Court noted, a contract can be entered into by conduct. In accepting the new rent, therefore, the Landlord’s conduct demonstrated the existence of a new agreement.

Lessons for Conveyancers

While there is an arguable presumption that a commercial lease document will need to be formally executed in order for it to be binding, this may not always be the case.

Subsequent conduct can be taken into account when determining whether a contract between parties exists.

This article was written by Gary Newton, Partner and Khushaal Vyas, Law Clerk at HWL Ebsworth.