Commercial Tenancy Contracts: dotting the I’s and crossing the T’s

The judgment serves as a caution to commercial tenants and landlords alike that occupation of a property, payment of rent, and operational commitments do not secure a tenancy, unless a formal written agreement is executed and completed.

Background

ACE Autobody Ltd (“ACE”) had entered into discussions with Motorpark Ltd (“Motorpark”) for the grant of a 10-year lease to ACE in relation to a portion of a commercial property for use as a motor body shop. ACE and Motorpark agreed a “Term Sheet” and instructed their solicitors to prepare and conclude a formal lease agreement. Importantly, the communications between the respective solicitors, in negotiating the proposed lease were marked “subject to lease” and no formal lease was ever agreed or signed.

ACE took possession of possession of the property without the benefit of a concluded  lease agreement. ACE expended significant monies in rebranding the property and on receipt of invoice for rent, ACE discharged those invoices. Within 18 months, vacant possession of the property was sought and it was asserted that ACE was mere licencee whereas ACE argued it had a 10 year lease.

ACE issued proceedings arguing that it had been encouraged to take possession of the property on the representation that it would be granted a 10 year lease. In this respect, ACE sought a declaration that it was entitled to a lease on the basis of proprietary estoppel.

The High Court

The High Court dismissed ACE’s claim deciding there was no concluded agreement for a lease. It was accepted that certain terms had been agreed but importantly there was no overall concluded contract. The High Court noted that the solicitor’s correspondence made it clear that the parties did not regard themselves contractually bound.

The Court of Appeal

The Court of Appeal took a different view to the High Court, deciding that a binding agreement existed when the principals “shook hands” on key terms of the tenancy. The view of this court was that the material terms of the lease were agreed and that the use of the expression “subject to lease” had no impact on the agreement reached by the principals on those material terms. The Court of Appeal also placed reliance on the fact that ACE had gone into possession of the property and undertook expenditure on the property thereby part-performing the agreement for lease.

The Supreme Court

The Supreme Court overturned the decision of the Court of Appeal. The Court said that context was important to resolve the issues on appeal noting that the parties had access to legal advice, had significant experience of transactions and intended that negotiations would lead to a comprehensive written contract setting out their respective rights and obligations.

The Supreme Court identified three main issues in the proceedings, as follows:

1. Formation of a Contract

The Supreme Court confirmed that a lease remained in negotiation while solicitors expressed communications to be “subject to lease” until a formal contract was agreed and executed.

Taking that one step further, the Supreme Court noted that ACE’s own solicitor had said that no contract would come into existence until such time as the contract was in agreed form, executed, exchanged and a contractual deposit paid. The Court said that while the usual conveyancing practice in Ireland did not involve a requirement for the exchange of contract, it was made a requirement in this instance.

The Supreme Court placed emphasis on parties agreeing all essential terms. In this scenario there had been no final agreement on the commencement date or as to whether ACE would execute a deed of renunciation in respect of its statutory renewal rights.

2. Part Performance

The Supreme Court ruled that in circumstances where there was no concluded agreement there could be no part performance. The doctrine of part performance could not come into play in this instance as ACE failed to satisfy the Court that there was an agreement in place.

3. Proprietary Estoppel

The Supreme Court considered the case law here and even more particularly in England and Wales where the issue of proprietary estoppel in a commercial context had been analysed in more detail.

Proprietary estoppel arises where a party relies to their detriment on clear assurances regarding rights in property, in circumstances where it would be unconscionable for the party to later withdraw those the assurances.

While there was evidence that ACE (i) relied on the assurances (which were described as vague) and (ii) incurred significant expenditure on the premises, the Court noted that ACE could not have reasonably believed it had a legally enforceable right, as no contract had been signed.

The Supreme Court observed that both parties were experienced commercial operators that had legal advice available, were involved in the negotiation of a complex commercial transaction on the agreed understanding that neither party would be bound unless and until a written agreement for lease was executed.

Lessons Learned

• If negotiations are ongoing on a “subject to contract/lease” basis, the fact that certain terms are agreed does not amount to a binding agreement.
• All essential terms must be agreed – in this instance the issue of a deed of renunciation had not been agreed.
• Part performance cannot be relied upon where no contract existed in the first place.
• Context is important – both parties had the benefit of legal advice and ACE were advised against going into possession of the premises but did so nonetheless.

For tailored legal advice on commercial tenancies and related disputes, please reach out to our below specialist team members.