Conditional clauses cause contractual chaos

It is no secret that contractual drafting can be a nightmare: even the smallest grammatical error can change the meaning and effect of a contractual clause, and one ill-considered word could jeopardise the validity of the entire contract. Some contracts contain ‘conditional clauses’, which mandate that certain events must occur or conditions be fulfilled before the contract is binding or enforceable. These clauses can have significant impacts upon the effect and enforceability of a contract, which was at issue in a recent decision of the Federal Court in ACME Properties Pty Ltd v Perpetual Corporate Trust Limited as trustee for Braeside Trust [2019] FCA 1189 (ACME Properties v Perpetual).

The Facts

The applicant, ACME, leased commercial premises from the registered proprietor of the premises, Perpetual, from 2016 to 30 June 2019. Towards the end of the lease term, the parties entered into negotiations regarding a new lease, in which Perpetual was represented by its agent, ARAM Australia Pty Ltd trading as ARA Australia (ARA).

As a result of these negotiations, ARA provided ACME with a document entitled ‘Offer to Lease’ on 25 March 2019. This ‘Offer to Lease’ document contained two leases, the first lasting a year from 1 July 2019, and the second lease commencing on 1 July 2020 for four years.

The Offer to Lease contained a clear stipulation that it was subject to ‘formal approval of the Landlord to be given or withheld in its absolute discretion; and execution of all legal documentation by the Landlord and Tenant’.[1] On 27 March 2019, ACME signed the Offer to Lease, which was subsequently signed by ARA “for an on behalf of the landlord”, Perpetual.

A little over a month passed before ARA notified ACME that Perpetual would be accepting an offer from a third party to lease the premises instead of proceeding with its previous offer to ACME. While the formal legal documentation had been prepared (in part) it had not been executed by either party. ACME commenced proceedings against Perpetual to enforce the Offer to Lease.

ACME submitted that the Offer to Lease (as signed by both parties) constituted a binding agreement to lease. Perpetual, on the other hand, argued that the Offer to Lease was not binding because the agreement was subject to all the legal documentation for the proposed leases having been executed, which had not yet occurred, and was subject to the Landlord’s formal approval (which had not been given despite ARA signing the Offer to Lease on Perpetual’s behalf).

The Decision

The Federal Court found in favour of the landlord, Perpetual, deciding that the Offer to Lease did not constitute a binding agreement to lease. His Honour emphasised the significance of the contractual words “subject to execution of all legal documentation by the Landlord and Tenant”, which had the effect of making the contract binding upon fulfilment of that condition.  His Honour said that the effect of those words was such that no contract was to come into existence independently of the legal documentation, which had not been executed.

A key distinction was drawn between the facts of this case and the case of RTS Flexible Systems,[2] which had similar facts albeit with a crucial difference. In RTS, unexecuted draft contractual documentation, which contained a ‘subject to contract’ clause, was found to constitute a binding contract because there was substantial subsequent conduct by both parties which indicated the parties had reached a binding agreement, thereby waiving the conditional clause.

The Lessons

This case serves as an important warning to potential contracting parties to read the contract carefully before signing, keeping an eye out for any ‘conditional’ or ‘subject to’ clauses. It is also important to be cognisant of the effect of these clauses, as courts are likely to give full effect to the ordinary language, which may render the contract unenforceable until such conditions are fulfilled.

If you are seeking advice on any contractual matters, or advice on agreements to lease, talk to our Business Team or Real Estate Team today.

[1] ACME Properties Pty Ltd v Perpetual Corporate Trust Limited as trustee for Braeside Trust [2019] FCA 1189 [6].

[2] RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG (UK Production) [2010] 1 WSLR 753.

Written by Katie Innes & Ben Grady with the assistance of Maxine Viertmann.