Are heads of agreement for a sale of a property binding?: McGorlick v Palmer [2022] VCC 1229

By Alicia Hill, Principal, Darsh Chauhan and Helena Swidron, Law Clerks

Introduction

On 8 August 2022, the County Court of Victoria delivered judgment in the matter of McGorlick v Palmer.[1] This case concerned whether the heads of agreement relating to the sale of a property and a business created legally binding agreement between the Parties. This required the Court to consider the proper construction of the terms in order to bring about the intended effect of the Parties. In her decision, Justice Ryan makes it clear that if a binding agreement is intended, then clear language and proper procedure is required. If not, one may suffer the same misfortune as the McGorlicks.

Background

Mr and Mrs McGorlick owned a farm from which they conducted a successful cheesemaking business. In April 2016, they discussed the sale of the property and the business with Palmer, who was also a dairy farmer, and who expressed interest in first leasing the premises. The parties exchanged documents and correspondence relating to these transactions and it was decided that Palmer would purchase the property for $1.1m and the business for $200,000.

In November 2016, Palmer regularly visited the farm where she was trained by Mr and Mrs McGorlick in the production of cheese, and one month later was informally made in charge of managing the property. In February 2017, the parties executed a heads of agreement (‘HOA’) which purported to ‘set out in writing the essential terms of an agreement between them in relation to the sale and purchase of the land … and the business’.[2] The HOA provided that:

• it was intended to be legally binding (clause 2);
• more detailed documents would need to be signed to give effect to its terms (clause 4);
• if the parties had not entered into a binding transaction by 1 December 2017, either party could give notice that the HOA was terminated (clause 5);
• Mr and Mrs McGorlick would immediately lease the property to Palmer (annex A);
• Palmer would be in charge of the property (annex A, clause 6); and
• the sale would be affected in 12 months’ time (annex A, clause 1);

In January 2017, Palmer moved her cattle onto the farm and commenced selling cheese through the business, but it did not perform as well as Mr and Mrs McGorlick did. Consequently, she fell behind in her rental payments to Mr and Mrs McGorlick, who subsequently repossessed the property. At a later meeting on 2 May 2017, Palmer reassured Mr and Mrs McGorlick of her intention to buy the farm and the business and successfully sought a reduction of future rental payments. Palmer further failed to comply with the varied agreement and Mr and Mrs McGorlick again repossessed the property. On 16 June 2017 the parties varied the HOA and Palmer was again permitted to manage the property and the business, but again fell behind on rental payments.

On 15 November 2017, Mr and Mrs McGorlick sent Palmer a contract of sale pursuant to the HOA but Palmer refused to sign on the basis that she was not bound by the HOA. Palmer continued to lease the premises until 22 December 2017 when Mr and Mrs McGorlick repossessed the property for the third time. They sold the property to a third party for $750,000 and gave evidence that the business was incapable of being sold because the premises were in such a state of disrepair. Mr and Mrs McGorlick sought damages in the amount of $663,758.50, comprising the loss incurred on the resale, the lost value of the business, and other repair and replacement costs.

Issue

The issue for the Court’s determination was whether the HOA created such relations between the parties that Palmer was legally bound to purchase the farm and the business.

Decision

The Court held that Palmer was not compelled by the HOA to purchase the farm and the business and therefore, the Court entered judgment in favour of Palmer.

Judgment

Justice Ryan commenced by reiterating the fundamental principle that contractual construction is an exercise to be done objectively. Her Honour then turned to the three scenarios discussed by the High Court in Masters v Cameron,[3] and the fourth category established by Baulklam Hills Private Hospital Pty Ltd v GR Securities Pty Ltd,[4] which operate in circumstances where parties execute a document whilst agreeing that the terms of their relations will be confirmed in a later, formal contract:

• where the parties have finally agreed on their obligation by which they are to be immediately bound yet agree to codify them in more precise terms in a later document;
• where the parties have finally agreed on contractual terms but have made performance of one or more of those provisions conditional on the execution of a later document;
• where the intention of the parties is not to make a bargain at all unless a formal contract is executed; or
• where the parties were immediately bound by the terms of their current agreement but had agreed to execute a later contract containing additional terms.

In finding for Palmer, Justice Ryan held that the HOA fell into the third of the above categories, which does not create binding relations, for the following reasons:

1. The HOA consistently referred to a later ‘proposed transaction’, indicating that formalisation was to occur at a future point in time;
2. The term of the HOA providing that the parties could not engage with others about the prospective sale operated only after further documents were identified or the HOA was terminated;
3. The HOA provided that it would expire if binding documents were not later signed;
4. Mr and Mrs McGorlick had not yet provided Palmer with a vendor statement under section 32 of the Sale of Land Act 1962 (Vic) which would have informed Palmer of basic information about the land without which she would not have entered into the contract;
5. The presumption in Victoria that parties do not enter a binding contract until each has a copy of the other’s written agreement had not been displaced by express writing;

Her Honour therefore held that Palmer could not have committed any breach by refusing to sign and return the contract documents.

However, despite it being unnecessary to do so, the Court made determinations on whether, if a breach had occurred, Mr and Mrs McGorlick waived their reliance on the agreement or were estopped from doing so because text messages exchanged between the parties allegedly caused Palmer to vacate the premises because they provided that if Palmer paid $10,000 to Mr and Mrs McGorlick, she could reside there until the termination of the lease. Palmer’s claim was that she placed reliance on that message conveying the meaning that she Mr and Mrs McGorlick would not exercise their rights under the HOA. The Court held that neither the claim of waiver nor of estoppel was made out because the representations did not have the meaning Palmer alleged they did, and because in any case, Palmer did not act in detrimental reliance on that representation by moving out of the property.

Takeaways

This case demonstrates the importance of drafting agreements with clear and precise terms, as the consequence of vague and informal terms may result in non-binding agreements. Here, the McGorlicks felt the financial burden of relying on a non-binding agreement. Therefore, to avoid any ambiguity, prior to engaging in any commercial relationship with another party, one should determine the intentions of each party and what outcomes are sought. Once these aspects are determined, drafting an agreement within those parameters will be easier and clearer.

Justice Ryan has also made clear the importance of following procedure and legal obligations as required under legislation, i.e. how the McGorlicks should have provided the vendors statement to Palmer. When entering into agreements, it is always essential to understand both your obligations under the agreement itself, in addition to your obligations under the broader scope of the law.

If you have any questions regarding this decision or any matters raised by it, please feel free to get in contact with Alicia Hill of the MST Dispute Resolution and Litigation team on (03) 8540 0200, or by email at alicia.hill@mst.com.au.

[1] [2022] VCC 1229.

[2] Ibid [17].

[3] (1954) 91 CLR 353.

[4] (1987) 40 NSWLR 622.