Take care with
‘subject to’ conditions in a Commercial Lease Proposal
When a commercial lease is agreed, it is normal for the
lessor and lessee to sign a Lease Proposal / Heads of
Agreement which contains ‘subject to’ conditions to be
satisfied before the lease becomes legally binding.
A recent decision of the Supreme Court of New South Wales
has demonstrated the legal significance of the ‘subject to’
conditions in Lease Proposals. This decision will prompt
commercial leasing agents, landlord and tenants to review
their ‘subject to’ conditions to reduce the scope for
uncertainty and legal dispute.
The decision is Realm Resources Ltd v Aurora Place
Investments Pty Ltd  NSWSC 379 (8 April 2019) (Darke
The Lease Proposal and the entry of the Lease
In June 2017, Aurora as sub-lessor and Realm as sub-lessee
signed a Lease Proposal for the lease of about 300 sq metres
on Level 16 of the Aurora Place building in Phillip Street
The Lease Proposal, prepared by Aurora’s agent Jones Lang
LaSalle, described the main provisions of a proposed lease.
At the end, was this ‘subject to’ condition:
The terms and conditions of this proposal are subject to:
i. availability of the Premises;
ii. Lessor’s Board approval; and
iii. satisfactory legal documentation being entered into by
This offer may be withdrawn in writing by the Lessor at any
This offer supersedes all previous correspondence.
The standard Aurora Place Lease agreement applies.
This document is not binding on the parties other than the
sections relating to Confidentiality and the Lease Deposit.
On 27 June 2017, Aurora’s solicitors issued a sublease for a
5 year term commencing on 1 September 2017. The terms of the
sublease, which was a 60 page document, were negotiated
between the respective solicitors.
The terms were agreed, and on 15 August 2017, Realms’
solicitors sent the sublease executed by the lessee by
courier to the Aurora’s solicitors. On 23 August, Realm’s
solicitors sent the certificate of currency of insurance,
which was the final requirement (the bank guarantee for the
security bond of $280,506 and the registration fee had been
The next day (on 24 August 2017), Realm had second thoughts
about the sublease, and its solicitors emailed Aurora’s
solicitors to request that Aurora not enter into the lease
until further notice:
We are instructed to request that you do not arrange for the
landlord to sign the lease at this stage, and that you hold
the lease signed by the tenant in escrow pending further
communication from us.
The heads of terms clearly states that the terms of the
proposal are subject to satisfactory legal documentation
being entered into by both parties. In these circumstances
neither party is bound unless and until a formal lease has
been executed by both the landlord and the tenant.
Realm did not proceed with the sublease and applied for a
declaration that no binding sublease was entered into,
relying on the ‘subject to’ condition. Aurora contended that
the sublease was binding, and that it was entitled to
recover $735,000 for unpaid rent and damages.
The ‘subject to’ condition in the Lease Proposal
The ‘subject to’ condition set out three matters to be
satisfied before the lease was binding upon both parties.
The Court focused on the third matter in the ‘subject to’
iii. satisfactory legal documentation being entered into by
The Court noted that it was unclear: “it is not prescriptive
as to the manner in which the parties would enter into the
satisfactory legal documentation, or the form the
documentation may take”. It was therefore left to the Court
to determine these matters.
The Court found that there was ‘satisfactory legal
documentation’ because after the terms were agreed, the
sublease as signed by Realm was sent to Aurora’s solicitors.
The more contentious issue was whether the sublease was
‘entered into by the parties’. The Court found that it had
been entered into, for these reasons:
- The sublease was intended to take effect as a deed, not as
a simple contract. That is, it was binding immediately. This
conclusion was strongly influenced by this clause in the
sublease: “This lease is a deed, even if it is not
registered”. The effect of registration at the titles office
is to make a document which is not a deed, take effect as a
- The formal requirements for a deed had been satisfied: It
was signed in accordance with s 127(1) of the Corporations
Act and was therefore was a deed for the purposes of 127(3)
of the Corporations Act.
- The deed was delivered by Realm, which is to say, the
executing party delivered the deed with ‘an intention to be
bound immediately’, ‘subject only to satisfaction of the
condition that Aurora bind itself’. Aurora subsequently
obtained board approval and signed the sublease.
The Court noted that: “No statement was made [in the Lease
Proposal or solicitors correspondence] to the effect that
neither party would be bound unless and until both parties
had executed the sublease. Therefore, Realm’s attempt to
‘pause’ the sublease by its email of 24 August 2017 was not
effective. The Court said that even if it had been possible
to withdraw from the sublease, the email was not effective
to do so because it did not clearly state that the offer to
lease was withdrawn.
In this case, the dispute arose because the lessee wanted to
walk away from the sub-lease at a late stage. There was no
suggestion that the ‘subject to’ condition was defective.
But the fact that the ‘subject to’ condition played a
central part in the Court’s deliberations suggests that it
could have been better drafted. For instance:
satisfactory legal documentation being entered into by the
satisfactory legal documentation, lessor’s requirements
being satisfied and the lease being signed by both parties
The 'moral' is that the 'subject to' conditions need to be
clearly drafted, so as to avoid legal disputes. In this
case, instead of 'satisfactory documentation being entered
into', it would have been clearer if it read 'documentation
satisfactory to the landlord being received by the