I’ve worked with many businesses to negotiate their commercial agreements, including retail leases. It can be a lengthy process of back and forth – in many cases, there are documents drafted prior to the signing of a formal agreement. For example, in lease negotiations parties often exchange letters of intent or heads of agreement which provide an outline of what the formal lease will entail.
Usually, these pre-contractual documents are not intended to be legally binding. However, there have been recent cases where a pre-contractual document or correspondence has been found to be legally binding despite the parties intending that the are “subject to contract”:
In Vantage Systems Pty Ltd v Priolo Corporations Pty Ltd, the landlord and tenant had exchanged various emails during the course of lease negotiations. Though the tenant ultimately did not sign the final proposed lease, the Court held that the proposed lease in negotiations was legally binding, due to the language that the lessee used in its emails. For example, the lessee said it was “happy with the terms of the proposal” and “approved” the terms. While the proposal would be superseded by a formal lease, it was found that the proposed lease was enforceable in the interim.
This case emphasises the importance of wording and conduct in relation to negotiations – for example don’t act like it’s a done deal until you sign on the dotted line!!!
The Court considers objectively whether the parties intended to enter into a legally binding agreement, so it is important to be careful of any wording that suggests an intention to bind, even in informal negotiations. It is best to make it clear that any such negotiations are not binding until a formal agreement is entered – if in doubt have your trusty lawyer look over the wording to ensure that you don’t become bound to an agreement that you didn’t intend!
 Vantage Systems Pty Ltd v Priolo Pty Ltd  WASCA 21.