Supreme Court New South Wales Medium Neutral Citation: Wayne Edward John Streat v Fantastic Holdings Limited [2011] NSWSC 1097 Hearing dates: 5 and 7 September 2011 Decision date: 09 September 2011 Jurisdiction: Equity Division Before: Pembroke J Decision: Specific performance of agreement to lease ordered. See paragraph [26] Catchwords: CONTRACTS - intention to be bound prior to execution by both parties of formal written contract - intention of parties ascertained objectively - Masters v Cameron (1954) 91 CLR 353 CONTRACTS - equitable remedies - specific performance - whether sufficient acts of part performance - payment of rent in accordance with new lease sufficient part performance Cases Cited: Allen v Carbone (1975) 132 CLR 528 Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 Blackburn Developments No 19 Pty Ltd v Downs (Surgical) Australia Pty Ltd (1974) 2 BPR 9141 Cobbe v Yeoman's Row Management Ltd [2008] 1 WLR 1752 Concorde Personnel Services Pty Limited v Fire and All Risks Insurance Company Limited (Supreme Court of New South Wales, Kearney J, 16 July 1986, unreported) Masters v Cameron (1954) 91 CLR 353 Pan American World Airways Inc v Commonwealth of Australia (1977) 7 BPR 15145 Summer Hill Business Estate v Equititrust [2010] NSWSC 776 Texts Cited: Sir Peter Millet, Equity's Place in the Law of Commerce (1998) 114 Law Quarterly Review 214 Neuberger, Thoughts on the Law of Equitable Estoppel (2010) 84 Australian Law Journal 225 Category: Principal judgment Parties: Wayne Edward John Streat - first plaintiff Anne Maaret Streat - second plaintiff Fantastic Holdings Limited - first defendant Rocket Batteries Pty Limited - second defendant Representation: Counsel: J C Giles - for the plaintiffs T S Hale SC with D J A Mackay - for the first defendant Solicitors: Somerville Legal - for the plaintiffs Solari & Stock - for the first defendant E H Tebbutt & Sons - for the second defendant File Number(s): 2011/272893 ex tempore Judgment Introduction 1The first defendant has been the lessee of commercial premises at Prospect continuously since 1 July 2002. For the period 1 July 2008 to 2 April 2011 it occupied those premises pursuant to registered lease No AE 721124. In these proceedings it seeks an order, among other things, for the specific performance of an agreement for lease of those premises for the period 3 April 2011 to 2 April 2014. I will refer to the first defendant as the tenant. It is a well known listed company. 2On 20 January 2011 the plaintiffs (collectively the lessor) submitted to the tenant a formal lease document containing all of the essential terms which the tenant had previously requested. On or about 1 March 2011 the tenant returned the duly executed lease document to the lessor. The lessor did not execute the document. It now contends that in the circumstances of this case it should be inferred that the objective intention of the parties was that neither party would be contractually bound unless and until the lease document was duly executed by both of them. It says that it was free to withdraw and has done so. Counsel for the lessor put it starkly - the lessor changed its mind. 3For the reasons that follow I have concluded that the tenant is entitled to specific performance of the agreement for lease embodied in the form of lease that was duly executed by it and returned to the lessor on or about 1 March 2011. By that stage nothing remained to be done other than for the lessor to execute the document. All of the terms of the lease had been agreed. The lessee is entitled to an order that the lessor duly execute the document. The Negotiations 4The evidence of the negotiations between the tenant and the lessor reveal how the parties progressed to the point where there was full agreement on all of the terms of the lease to commence on 2 April 2011. Those negotiations commenced in September 2010. Their course during September and October 2010 was as follows: (a) On or prior to 20 September, Mr Streat on behalf of the lessor, explained to the tenant that the lessor was encountering financial difficulties with its lender. (b) On 20 September, Mr Bailey, on behalf of the tenant, sent an e-mail with a proposal for a new lease as a way of assisting the lessor with some early planning. (c) The offer consisted of the following terms which the parties referred to as the essential commercial terms: Premises: 20 Rowood Road Prospect NSW Commencement Date: Term: 3 rd April 2011 Term: 3 years Option: 2 years Rent: $164,229.00 pa Gross & GST (Passing rent) Rent Free: 1 month rent free at commencement of each year (3 months in total) Outgoings: n/a Gross lease Rent reviews: Fixed 2.5% increases. Market at option capped at 8% Other: Offer pending board approval and approved re-finance of the building. (d) An important feature of the offer was that the rent would remain the same but that there would be an offset in the form of a one month rent-free period at the commencement of each year of the lease. (e) On 15 October Mr Streat replied by e-mail thanking Mr Bailey for his understanding. With minor qualifications he agreed with Mr Bailey's proposal. He concluded by saying that "If we can lock this in place immediately, it will be of great assistance to us in our refinancing of the property." (f) On 18 October Mr Bailey responded by e-mail clarifying the rent-free aspect of the proposal. He concluded by saying, "If you can please re-accept the offer with the above understanding or forward your response." (g) On 19 October Mr Streat replied saying in effect that he had given enough already, particularly in relation to the rent-free period. However, he concluded with a concession, saying "...if pushed and with reluctance, I will accept to waive the first month of the first year's rent only." (h) On 20 October Mr Bailey responded with a counter proposal, suggesting a one month rent-free period at the commencement of the first year and half of one month rent-free at the commencement of the second year. He also sought an additional option and withdrew the previous requirement that there be "approved refinance of the building". He also said that on confirmation of the lessor's acceptance of his offer he would put it on the tenant's letterhead so that the lessor could present it to its bank. (i) The essential commercial terms proposed by the tenant on 20 October were as follows: Premises: 20 Rowood Road Prospect NSW Commencement Date: Term: 3 rd April 2011 Term: 3 years Option: 2+5 years Rent: $164,229.00 pa Gross & GST (Passing rent) Rent Free: 1 month rent free at commencement & Half of 1 month rent free at commencement of year 2 Outgoings: n/a Gross lease Rent reviews: Fixed 2.5% increases. Market rent at option capped at 8% Other: Offer pending board sign off. (j) Later, on 20 October, the lessor's financial controller (Ms Goddard) informed Mr Bailey "Just finished a meeting with Wayne and he is happy to go ahead with your proposal. Could you please prepare the letter of intention and fax it to ...." (k) Mr Bailey responded shortly afterwards attaching a formal letter on the tenant's letterhead for submission to the lessor's lender. He asked Mr Streat to "forward the new lease to me once prepared." (l) The letter attached to Mr Bailey's e-mail contained a variation to the previous proposal. It now proposed that each party pay its own legal costs. The terms of the letter were as follows: This letter is to confirm our agreement, and that we agree to enter a new lease under the following terms: Premises: 20 Rowood Road Prospect NSW Commencement Date: Terms: 3 rd April 2011 Term: 3 years Option: 2+5 years Rent: $164,229.00 pa Gross & GST (Passing rent) Rent Free: 1 month rent free at commencement of year 2 Outgoings: n/a Gross lease Rent reviews: Fixed 2.5% increases. Market Rent Review at option capped at 8% Legals: Each party to pay their own. We look forward to a continued partnership at these premises, if you could please commence drafting the paperwork for signing. 5For obvious reasons the lessor relied on the first sentence of the 20 October letter and the tenant relied on the last sentence. Nonetheless, all elements of the proposal set out in the tenant's letter dated 20 October were satisfactory to the lessor, including the additional proposal that each party pay its own legal costs. The Making of the Agreement 6On 20 December 2010, in recognition of its concurrence to the proposed terms, the lessor sent to the tenant a formal lease document that embodied the terms proposed by the tenant on 20 October, as well as other standard terms that were identical to or materially the same as the existing lease. That lease document went astray and was not received by the tenant through no fault of either party. 7The lessor then re-sent the lease document to the tenant on 20 January 2011. The form of lease sent on 20 December and 20 January was the same as that of the then existing lease. It contained provision for execution by both tenant and lessor. Upon receipt, the lease document submitted by the lessor was reviewed internally by the tenant, approved and then duly executed. It was then returned to the lessor on or about 1 March 2011. 8There is no doubt that by 1 March 2011, if not also by 20 January 2011, there was agreement by the parties as to all of the terms of the lease. By "agreement" I mean that both tenant and lessor were of one mind as to the terms of the new lease. At a minimum there was a consensus. No terms remained for further negotiation and nothing remained outstanding other than execution. As at 20 January 2011, execution by both parties was outstanding. By 1 March 2011, only execution by the lessor was outstanding. 9Counsel for the plaintiff described the agreement as one that was binding only in honour. Whatever way one describes it, Mr Streat later changed his mind. The evidence as to when he did so is opaque. But it could not have been before 20 January 2011. Otherwise the submission of the lease document to the tenant (for execution and return) on 20 December and again on 20 January 2011 would have been duplicitous. It would have been a solemn farce. 10The sole contention on which the lessor now relies is that when looked at objectively, the parties should be taken to have intended that they would not become contractually bound until execution of the lease document by the lessor as well as by the tenant. Objective Intention 11This question is be resolved by ascertaining the objective intention of the parties as disclosed in their correspondence and communications viewed in the light of the subject matter and the surrounding circumstances: Allen v Carbone (1975) 132 CLR 528; Pan American World Airways Inc v Commonwealth of Australia (1977) 7 BPR 15,145 (CA); Australian Broadcasting Corporation v XIVth Commonwealth Games (1988) 18 NSWLR 540 (CA). When those communications and circumstances are reviewed there is, in my view, no support for the contention that the bargain which the parties reached could not have been intended to be a legally enforceable contract unless and until the lease document was executed by both of them. cf Masters v Cameron (1954) 91 CLR 353. On the facts of this case, I do not think that an inference is reasonably open that either party regarded itself as being free to withdraw after 1 March 2011. By that stage the tenant had returned to the lessor the duly executed lease document which the lessor had submitted to it for that very purpose. 12In fact the opposite inference is irresistible. The lessor wanted the commitment of the tenant in order to satisfy its lender. It was grateful for the offer of a formal letter from the tenant to be presented to its lender. The purpose of submitting the letter to the bank was to satisfy the bank about the tenant's long-term commitment (3 + 2 + 5 years) and the regular income stream that would be received. The purpose of submitting the lease to the tenant and requiring its execution and return was to secure that commitment. The return of the duly executed lease confirmed that commitment. From the lessor's perspective, let alone the tenant's perspective, it bound the tenant. 13Looked at objectively, when the lessor embodied in a lease document the agreed essential commercial terms together with the remaining standard terms taken from the then existing lease, and submitted that document to the tenant, it was making a final offer in a form capable of acceptance, leaving nothing for further negotiation. The tenant's subsequent execution of the lease document and the return of it to the lessor signified its unqualified acceptance of that offer. In those circumstances a reasonable bystander would regard the due execution of the document by the lessor as a formality; whose inevitable likelihood went without saying. 14The circumstances in this case are unlike Pan American World Airways Inc v Commonwealth of Australia (supra). Each case of this type will turn on its own unique facts. The circumstances in the Pan Am case are distinguishable. The parties were a multinational corporation and a sovereign state. The negotiations dealt with a number of leases in different sites and required Pan Am to surrender sites that it held in exchange for various concessions. The negotiations were far more complicated than in this case. 15This case is much closer to, and indeed stronger than, Blackburn Developments No 19 Pty Ltd V Downs (Surgical) Australia Pty Ltd (1974) 2 BPR 9141 and Concorde Personnel Services Pty Ltd v Fire and All Risks Insurance Company Ltd (Supreme Court of New South Wales, Kearney J 16 July 1986, unreported). In the first case, the agreement in question was a lease renewal. There was no exchange of lease documentation - draft or otherwise - merely correspondence evidencing negotiation and acceptance of terms additional to the existing agreement. In the second case, a draft lease document was exchanged that was expressed to be subject to the defendant's instructions and comments. Kearney J held that the parties had created a binding contract based on the correspondence exchanged. 16The parties in this case had passed the stage of negotiation. All of the terms had been settled and included in a formal document. The tenant accepted and agreed to all of the detailed terms. The most important terms, the essential commercial terms, had been proposed by the tenant as early as 20 October 2010 and agreed to by the lessor at least by 20 December 2010, if not earlier. Lessor ' s Contentions 17The lessor's case relied on the following matters, none of which is in my mind sufficient to displace the inference from the objective facts that at least by 1 March 2011, the parties would have regarded themselves as bound by the terms of the lease document that had been executed by the tenant and returned to the lessor. 18First, it was said that, looked at objectively, the language of the parties' negotiations culminating in the tenant's offer on 20 October 2011 was inconsistent with an intention to be bound before a formal lease was executed by both parties. I do not agree. Those communications may not suggest a legally binding agreement at 20 October 2010 but they did not foreclose the likelihood that the parties would regard themselves as bound when all the terms were embodied in a formal lease document agreed to by both parties - let alone one that was submitted by the lessor, executed by the tenant and returned to the lessor. The language of the negotiations up to 20 October 2010 does not demonstrate expressly or by necessary implication that the parties intended only to be bound when a formal lease document was duly executed by both of them. 19Second, the lessor relied on the prior history of leases between the parties. This is, however, inconclusive. In 2002 the solicitors for the lessor wrote to the tenant's solicitors demanding the return of the duly executed lease. This is commercially understandable but does not assist the resolution of the issue in this case. It is to be expected that a lessor would wish to receive from the tenant a duly executed lease that signifies the commitment of the tenant. On the other hand, it would hardly be expected that upon the receipt of the lease executed by the tenant, the lessor could reserve for itself the right to withdraw and refuse to execute the lease document. That is what happened in this case. There was similar correspondence in 2008 also seeking execution of the lease by the tenant. These two instances do not, as a matter of logical analysis, support the contention that in 2011 the parties would not have considered themselves bound until the lease was executed by both tenant and lessor. 20Third, it was said that the parties were sophisticated commercial parties who well knew that before either party would be bound there needed to be a lease signed by both of them. The tenant certainly was commercially sophisticated and was experienced in leasing transactions. But it does not logically follow that a reasonable bystander would infer that the parties intended that neither would be bound until the lease was executed by both of them. The lessor obviously wanted a signed lease. And once it received the signed lease from the tenant, I infer that it would have regarded itself as being entitled to hold the tenant to the bargain. From that moment both parties would have regarded each other as bound. The circumstances of this case are not such as to suggest that the execution of the lease by the lessor was critical to the coming into existence of a binding agreement. There is nothing in the objective facts or the sequence of negotiations to suggest that the parties contemplated that once the tenant returned a duly executed lease, the possibility of a binding agreement remained at large, at the whim of the lessor. 21Finally, the lessor relied on follow-up letters from the tenant seeking a copy of the duly executed lease from the lessor. Evidence of subsequent conduct may, of course, be admissible to prove the existence or non-existence of an agreement. But there are several answers to this contention. The tenant's conduct was simply commercially prudent. It does not, without more, operate as an acknowledgment that the tenant recognised the legal necessity of the lessor signing the lease before it would be binding. It does not necessarily permit the inference for which the lessor contends. It is inconclusive. Additionally, on 20 April 2011 the tenant was served with a notice from the lessor's lender stating that it was claiming possession of the land. In those circumstances, the natural reaction of an experienced tenant would be to ensure that it held in its records a copy of the lease executed by the lessor. That is not a recognition that, in the particular circumstances, execution by the lessor was a condition precedent to a binding agreement. It is just good business practice. Part Performance 22Consistently with the agreement for lease embodied in the lease document that the tenant executed and returned to the lessor on 1 March 2011, the tenant continued to occupy the premises after 2 April 2011. Significantly, it paid rent not in accordance with the expired lease, but in accordance with the proposed new lease. That lease provided for a rent-free period of one month at the commencement of the term of the lease. The parties adhered faithfully to that agreement. The lessor issued invoices in April and May 2011 which recognised the agreed rent-free period. The amount of the rent paid by the tenant reflected that agreement. The conduct of the parties in this respect was in part performance of the agreement contained in the lease document executed by the tenant. Their conduct was referable only to that agreement and not reasonably explicable on any other basis. 23There have been sufficient acts of part performance. There is no obstacle to an order for specific performance. The first defendant is entitled to an order for specific performance of the agreement for lease. Alternative Claim 24The tenant's alternative claim in estoppel does not therefore arise. I do not propose to express a view on it other than to say that I have a natural reluctance to allow the doctrine of estoppel to intrude too readily into a contractual relationship between commercial parties: Summer Hill Business Estate v Equititrust [2010] NSWSC 776 at [35] - [40]; Cobbe v Yeoman's Row Management Ltd [2008] 1 WLR 1752 at 1786 (Lord Walker); Sir Peter Millett, 'Equity's Place in the Law of Commerce' (1998) 114 Law Quarterly Review 214; Lord Neuberger of Abbotsbury MR, 'Thoughts on the Law of Equitable Estoppel' (2010) 84 Australian Law Journal 225. 25The conduct of proceedings in the Expedition List sometimes involves compromise by the parties or by the court. I am conscious of the general desirability of determining alternative claims. But in this case the parties sought an expedited hearing and an urgent decision. Court time was allotted at short notice and the hearing took longer than estimated. During and following the hearing it has been necessary to accommodate the competing claims of other litigants. For these reasons it has been necessary to give ex tempore reasons limited to the main issue. I have done so having regard to the practical exigencies that I have explained and because of my view as to the strength of the tenant's claim for specific performance of the agreement to lease. Orders 26I therefore make the following orders: (a) I order the plaintiffs to forthwith duly execute the lease document returned to them by the first defendant on or about 1 March 2011 and to cause it to be registered. (b) I order the plaintiffs to pay the defendants' costs. oOo DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 19 September 2011