Written by It is common in commercial and retail leasing transactions for both parties to sign a preliminary document that is not legally binding unless a formal lease is signed and exchanged – such as a Terms Sheet, Heads of Agreement, or Letter of Offer.
Such preliminary documents often create a guise of completion, even though the formal lease is not finalized. If the preliminary document suggests that the deal isn’t finalized, the court will uphold the position that neither party is bound until there is evidence of some conduct or understanding that creates a legally binding commitment. This applies to scenarios where one party changes their mind before a lease is formally signed, as decided in Centuria Property Funds Ltd v Thorn Australia Pty Ltd [2022] NSWCA 104. The principles established in this case apply equally to other commercial agreements which require parties to sign formal legal agreements.
In Centuria, the landlord and tenant had executed a Heads of Agreement for a commercial premises in Eveleigh NSW, stating that it was not intended to be binding, and that either party could withdraw at any time before the execution of formal leasing documents. The COVID-19 pandemic delayed the signing of these formal documents, and during that time the tenant had paid the deposit, given a bank guarantee and certificate of currency, and been granted early access to the property to organize telecommunications. The tenant changed their mind shortly after August of 2021, withdrawing from the lease transaction.
It was decided that the preparation of telecommunications services is not enough to create a legally binding lease commitment, in the absence of fully signed and exchanged lease documents. The landlord appealed, but the Appeal Court agreed that early access has nothing to do with whether the tenant showed intention to be immediately bound.
It is crucial that tenants and landlords must follow through with formal signing and exchanging lease documents with diligence. It is unwise to rely on preliminary documents, apparent intent, or the goodwill of another party.