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Are Heads of Agreement for Lease Legally Binding?

Are Heads of Agreement for Lease Legally Binding?

A heads of agreement for lease can be legally binding or non-binding.

Typically, a heads of agreement is used to outline and negotiate the key lease terms before parties sign a binding lease agreement. So, often, a heads of agreement itself would not constitute a binding lease document. In situations where the parties did not sign a formal lease document and wish to rely on the heads of agreement as a binding lease agreement, the court will look at various factors including the intention of the parties at the time of signing the heads of agreement, the conduct of the parties and the words in the heads of agreement.

What is a lease heads of agreement?

Generally, a heads of agreement for a commercial or retail lease is a document that is used by the lessor and lessee to negotiate the key terms of a lease before entering into an enforceable lease agreement. This means that if ultimately the parties do not agree to final terms and a party withdraws from the negotiation, this will not constitute a repudiation of the heads of agreement.

When does a heads of agreement for lease constitute a binding lease agreement?

Typically, a lease heads of agreement will stipulate key commercial terms, such as rent, rent adjustments, outgoings, term, renewal options, insurance, fit-out details, etc. However, a lease heads of agreement will often state that parties will not be bound until a formal lease agreement is signed.

If the heads of agreement states it is a binding agreement, then this indicates that the parties intend to be immediately bound by the terms set out in the heads of agreement before a formal lease is signed.

In certain situations, whether a heads of agreement for lease constitutes a binding agreement for lease is not always certain. Disputes can arise if negotiations break down and there is no formal lease in place but a party has already expended money in fitting out the premises, or if the lessee has already taken possession of the premises.

In the event of a dispute, a court will often look at the following factors in determining whether a heads of agreement constitutes a binding lease agreement:

  • the intention of the parties at signing;
  • the conduct of the parties before signing;
  • the words used in the heads of agreement;
  • whether the key terms of the lease, such as rent and duration of the lease have been agreed upon;
  • the term of the lease;
  • the type of lease; or
  • whether the lessee has taken possession of the property.

Tips for parties entering into a lease heads of agreement

If you are currently negotiating a commercial lease and is presented with a heads of agreement for signing, ensure that the content accurately reflects the intentions of the parties, in particular, whether the agreement is intended to be binding or non-binding. This should be explicitly stated in the agreement.

Even if a heads of agreement is signed, we recommend that a formal lease be drawn up before possession of the property is granted or taken. Disputes between parties often arise where a lessee enters into possession of a property before a formal lease document is signed, and the parties later disagree on terms of the lease. From both the lessee’s and the lessor’s perspectives, it is advisable to not take or give possession of the property until the parties have reached an agreement on key terms of a lease and have committed this in writing.

West Perth Legal regularly assist landlords and tenants with drafting of leasing documents, including heads of agreement and formal lease agreements, and representing clients on lease-related disputes. Contact us for a complimentary discussion about your leasing questions.