When do lease negotiations become binding on the parties?

Often when parties enter into negotiations before signing a contract, the parties will intend that they are not bound until the contract is drawn up and signed.  In terms of leases, section 24 of the Property Law Act 2007 sets out that, in order to be enforceable, a lease must be in writing and signed by the party against whom it is to be enforced.   A recent decision of the High Court, Dunroamin Nurseries Ltd v Zealandia Horticulture Ltd [2013] NZHC 1074 (Dunroamin), holds that this can be negated if the circumstances indicate that the parties intended to be bound by negotiations entered into before a formal lease was signed.  This article summarises that case and provides some guidance for both landlords and tenants when entering into lease negotiations.

The facts

In Dunroamin, the landlord (Dunroamin Nurseries Limited) and tenant (Zealandia Horticulture Limited) had been in a business arrangement with each other for some years.  The tenant was leasing a premises which belonged to the landlord and after some time the tenant’s business grew to the point where new premises were required.  A proposal was developed to demolish the existing building and build a new purpose-built distribution depot.  The depot was constructed and the tenant started operating from the new premises.  A draft deed of lease was prepared but a final version was never signed.  The tenant was paying rent to the landlord in accordance with the draft lease.

After three years, a dispute arose between the parties as to the terms of the lease.  The tenant sought to terminate the lease, alleging that it had never agreed to the terms of the draft deed, and that there was a month to month tenancy in place.  The landlord asked the Court to enforce the draft deed of lease.

The negotiations and the Court decision

The Court considered the lease negotiations between the parties in detail, which were as follows:

• Negotiations started in February 2008 on very general terms.  The Court could not find any concluded agreement on any aspect of the proposal at this stage. 
• In April 2008, the parties met to discuss the terms of the lease.  Again, it was clear that the parties had not reached agreement.
• The landlord then commenced with the construction of the premises and obtained advice from a valuer as to a likely rental figure.  The landlord passed this figure onto the tenant.  The Court found that at this stage there was no formal offer made nor any acceptance. 
• In May 2008, the landlord instructed its solicitor to prepare a deed of lease which included terms usually included in a lease such as term, commencement date, rent reviews, and rights of renewal.
• The parties met in June 2008 and the landlord presented the deed of lease to the tenant.  The tenant did not take the lease away from this meeting.  The presentation of the deed of lease at this time was not considered by the Court to be a formal offer as it was not taken away to be considered.
• There was a further meeting in August 2008 where the lease was given to the tenant and taken away.  Handing over the deed of lease was considered by the Court to be an offer by the landlord.
• Later that month, the tenant entered into possession of the premises and did not make any offer of other lease terms to the landlord.  The tenant did not make any suggestion that the lease terms were not acceptable to it. 

The Judge noted that acceptance of an offer can be inferred by looking at the conduct of the parties.  The Court held that silence is not acceptance, but silence accompanied by certain conduct may be acceptance.  The Court considered that the conduct of the tenant in this case could only be interpreted as acceptance of the landlord’s offer.  On that basis, the Court made an order that the draft deed of lease was enforceable against the tenant.

Guidance for landlords and tenants

This case highlights the importance of being clear as to when an offer has been made and whether and when the offer has been accepted, binding the parties to the agreement.  The failure to expressly reject an offer or make a counter offer may result in acceptance of an offer being inferred.

To avoid a similar situation, we recommend:

• Parties clearly document any contract between them.
• Entering into an agreement to lease prior to construction of premises or prior to spending significant sums of money, even if you have a longstanding relationship with the other party.
• If you do not intend to accept an offer, you must communicate this clearly and in writing.   
• If the intentions of either party are unclear, or could be misinterpreted, make your position clear and seek confirmation of the other party’s position.  In this case, the tenant should have communicated with the landlord that it did not accept the terms of the draft lease.  Likewise, the landlord should have followed up with the tenant and insisted that the deed of lease be signed.

If you would like further information please contact Dale Thomas on 07 958 7428.