In the recent Victorian Court of Appeal case The Edge Development Group Pty Ltd v Jack Road Investments Pty Ltd, a letter setting out key terms for the purchase of land and executed by both parties, was held not to be legally binding.
The case is a useful refresher on the law in this area.
The document in dispute was a letter on the real estate agent's letterhead, called an 'Offer to Purchase' and dated 30 October 2017.
The letter contained the following:
- Title details of the land;
- It said it was the proposed terms and conditions for the purchase of the property;
- It said the vendor's standard contract of sale will be adopted and incorporate the following details:
- a) The parties names;
- b) The price of $6 million;
- c) That a 20% deposit was to be paid on execution of the 'Contracts for Sale', with 1% payable on signing of the letter;
- d) That the 20% deposit was to be released 30 days after the exchange of contracts;
- e) Settlement was 14 June 2018;
- f) That the purchaser was to have immediate access to an Office and warehouse on the land, under licence, upon payment of the deposit and execution of the Contract for Sale;
- g) That the purchaser agreed to be bound by an attached Confidentiality Deed Poll;
- h) That prior to exchange, the vendor would provide the purchaser with a notice pursuant to section 27 of the Sale of land Act 1962 (Vic) (Act) to be signed and returned on exchange;
- i) That the offer was 'subject to the contract being executed';
- j) That the Confidentiality Agreement was to cease upon execution of the contract for sale;
- k) That once the deposit was released, the licence could not be revoked unless settlement failed.
- l) The letter said: 'We hereby agree to the above terms and conditions' and had spaces for the vendor's and purchaser's signatures.
The purchaser signed and dated the letter on 2 November 2017 and inserted two handwritten conditions, being j and k above. They also signed the "Confidentiality Deed Poll", which referred to the 'proposed sale of the property'. The vendor counter signed the letter on 3 November 2017.
The vendor then gave the purchaser various certificates and documents relevant to the land title, land tax and planning. Shortly afterwards, the purchaser was given keys to occupy the premises on the land. It then paid the 1% deposit.
On 30 November 2017, the vendor told its agent that it had received a much higher offer for the land. The agent invited the purchaser's best and final offer. The purchaser responded by lodging a caveat over the land relying on a purchaser's contract to buy the land. The vendor brought proceedings seeking the removal of the caveat. The purchaser then sought specific performance of the letter as a binding contract and the transfer of the land.
The Court of Appeal reviewed the key legal principles to be applied in assessing whether a document is a legally binding contract.
Masters v Cameron
In Masters v Cameron, the High Court identified the three usual categories for these types of disputes. These were:
- Where the parties agree in a document all the terms and intend to be bound, but propose that the terms be incorporated into a fuller more precise document, not different in effect – these terms are binding;
- Where the parties agree all the terms in a document and intend to be bound, but make the performance of one or more terms conditional upon the execution of a formal contract – these terms are binding; and,
- Where the parties do not intend to make a binding agreement in the document until they execute a formal contract – these terms are not binding.
A fourth category is found in an earlier High Court case. It is where the parties intend to be bound to agreed terms immediately, but expect to make a further contract containing additional terms to be negotiated, rather than just the same terms – the earlier terms are binding.
Deciding the intention
To decide whether the parties intended to be legally bound to the terms in a document in the first place, the court looks at the question objectively. They first examine the words in the document and consider them in the commercial context and where appropriate, they will consider the circumstances surrounding the creation of the document known to the parties.
It is not a subjective test, as to what either party thought at the time. Rather, the court looks at what a reasonable person would believe, looking at the parties' pre-contract conduct and the document's words.
Post-contract conduct is rarely admissible for the purpose of determining the parties' intentions at the relevant time when the document was executed. It can be relevant as an admission against a party's interest.
Subject to contract
As mentioned, the letter stated that it was subject to the contract being executed.
The Court of Appeal said that past cases have recognized that words like 'subject to contract' in a document, prima facie create an overriding condition, so that what has been agreed upon must be regarded as the intended basis for a future contract and not a contract. They noted an obiter comment of Lord Greene MR in a UK case, in which he said that he had never known a case where it had been suggested that such words meant other than there was no binding contract until a formal agreement was exchanged.
Where no such words are used, it becomes a matter of construction as to whether the parties intended the document to be a binding agreement, which was to be later written up formally, or whether the later formal agreement was to be the binding agreement.
The post letter conduct by the parties was not held to be relevant here. Paying a small deposit was not determinative. The access to the property and handing over of the key were also not explained in the evidence and so were not capable of being admissions by the vendor as to the legal effect of the letter.
In this case, the letter fell into category three of Masters v. Cameron and was held not to be legally binding.
The parties were found to still be in negotiation. Despite paying the 1% deposit and being given keys to occupy the premises, the Court of Appeal determined that a binding contract would only have arisen if the parties had executed and exchanged a formal contract for sale of land.
A number of key indicia lead to this conclusion, being:
- The reference in the letter to ceasing confidentiality, paying the full significant deposit and access being granted to the premises on the land all occurring on execution of the vendor's standard contract for sale;
- The letter stated that it was subject to the contract being executed, which had a natural meaning, namely that what had been agreed was the basis for a future contract and not a contract;
- The required section 27 Notice under the Act was required on exchange of a formal contract;
- Once the deposit was released, the licence was irrevocable, unless no settlement occurred;
- No formal vendor's statement under section 32 of the Act was provided with the letter. This was a criminal act and allowed the purchaser to rescind anyway if the letter was binding; and,
- The licence terms were not specified in the letter.
This case reminds us that parties should ensure that their intentions to be legally bound or otherwise are expressly spelt out in any executed document which contains negotiated terms, including an offer or heads of agreement.
If the document is not intended to be legally binding and is subject to a later formal document being executed, it should clearly say both things in its terms.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.