25 Nov 2021

"Writes reserved": Managing correspondence to avoid the inadvertent creation of a binding and enforceable contract

By Michael Richardson, Leighton Smith and Eric Jeffery

The Ultra Tune Properties (QLD) No 2 Pty Ltd v DNR1 Pty Ltd case reaffirms the importance of ensuring clarity of communications in circumstances which may give rise to an inadvertent creation of a binding and enforceable agreement.

A recent decision of the Queensland Supreme Court highlights that mismanaged correspondence may unintentionally result in the creation of a binding and enforceable contract. It serves as an important reminder for all parties to contractual negotiations, but particularly landlords and tenants during negotiations for leases.

The decision: Intention remains the key consideration

Ultra Tune Properties (QLD) No 2 Pty Ltd & Anor v DNR1 Pty Ltd [2021] QSC 215 related to a leasing arrangement between Ultra Tune Properties Pty Ltd (Tenant) and DNR1 Pty Ltd (Landlord) for a commercial premises on the Gold Coast (Premises).

Over the course of a year, the Landlord and Tenant engaged in negotiations for a new lease for the Premises via letters and emails.

The Tenant asserted a binding and enforceable agreement to lease was entered into during those negotiations. Of particular relevance to the Tenant's claim were the following communications:

  • A letter sent by the Landlord to the Tenant which enclosed a draft lease, which contained an express qualification that submission of the draft lease was not an offer to enter into a legally binding agreement on its terms;
  • A further letter sent by the Landlord to the Tenant which explained the Landlord's position on a number of points raised by the Tenant previously and expressed a view that the prior draft required no amendments. Importantly, this letter did not include an express statement confirming the document was not legally binding; and
  • An email sent by the Tenant to the Landlord, stating that its "director has effectively signed the lease".

The Tenant asserted that the above constituted an agreement under which the parties had completely agreed on all terms of their bargain, subject only to execution of a formal lease document. The Court disagreed with this assertion and found that no binding and enforceable agreement had yet been reached.

An "offer" or just a step in negotiation?

Amongst other things, the Court had particular difficulty with the Tenant's submission that the Landlord's failure to include an express qualification in its letter constituted a waiver of the earlier express qualification, or a new offer capable of acceptance.

In considering whether an agreement was reached, His Honour referred to an earlier case which noted that the question of "intention" of the parties was paramount and was to be resolved objectively.

In this instance, the Court found that the Landlord's letter did not indicate that the Landlord had reached a "final position" on the issues raised in negotiations by the Tenant. Further, in these circumstances, the letter responded in a manner that anticipated a response by the Tenant. Therefore, it could not be reasonably understood as a waiver or a new offer as the Tenant purported. It was simply another step in the negotiation.

Not quite an "acceptance"

Separately, the Court took issue with the Tenant's assertion that it had accepted the Landlord's purported offer. To do so, it is critical that a reasonable person in the position of the counterparty would understand the correspondence as an acceptance. A clear statement purporting to accept the offer must be identified.

In this instance, the Tenant's statement that its director "has effectively signed the lease" was found to only convey a message that the director had done something short of signing the lease, rather than conveying that he had actually signed it.

Key takeaways for landlords and tenants in negotiations

This case reaffirms the importance of ensuring clarity of communications in circumstances which may give rise to an inadvertent creation of a binding and enforceable agreement (or the opposite, in cases where a binding agreement is intended). Although a binding agreement was not created in this instance, the case serves as a reminder that leases and agreements to lease may inadvertently become binding with relative ease.

When negotiating leases, landlords and tenants should ensure that they include express qualifications as to the creation of a binding agreement (if that is the intention of the parties) and review all correspondence through an objective lens.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.