Leasing a commercial property is a 3 stage process:
- Appointing a managing agent to find a tenant
- Negotiating and then signing a Lease Proposal with the tenant
- Negotiating and then signing Lease Documentation and receiving the requirements
A Lease Proposal (Heads of Agreement) contains a summary of the agreed terms. It is not the final Lease, and so it contains 'subject to' conditions, such as:
- availability of the Premises
- landlord's board / lender's approval
- satisfactory legal documentation being entered into by the parties
From time to time, the question arises: When is the tenant legally bound under the lease? The answer is: When the 'subject to' conditions have been satisfied.
In a recent NSW Supreme Court decision, a tenant argued that it could walk away from the lease even after returning the signed lease, a bank guarantee for the security bond and a certificate of currency for insurance to the landlord's solicitor because the landlord had not signed the lease. At stake was $735,000 in unpaid rent.
The Court agreed with the tenant that the 'subject to' condition of 'satisfactory legal documentation being entered into by the parties' was ambiguous because it did not specify how the documentation was to be entered into.
After one day in Court and 18 months after the tenant had walked away from the lease, the Supreme Court interpreted the 'subject to' condition in favour of the landlord, and the tenant was ordered to pay the back rent.
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 had read 'documentation satisfactory to the landlord being received by the landlord'.
To read my case note,