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To Bind Or Not To Bind: When Do Preliminary Land Sale “Agreements” Become Legally Binding?

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By Nicholas Mason, Law Clerk and Alicia Hill, Principal, MST Lawyers

Introduction

This article considers the decision of Count On Us Enterprises Pty Ltd v Hume Machinery Pty Ltd [2018] VSC 787 where the Victorian Supreme Court assessed circumstances in which signed pre-contractual documents may constitute an enforceable sale agreement between a landowner and a property developer.

Background

In October 2017, Mr Mukesh Chopra, in his capacity as Area Manager for VSS Real Estate Pty Ltd, produced a two-page document entitled “Heads of Agreement” on behalf of Count On Us Pty Ltd to Mr Peter Green, a director of Hume Machinery Pty Ltd.

The document stated that:

  • “This is an expression of interest on 225 Olivers Road, Mickleham”
  • “The Vendor will deliver a Vendor’s statement to the Purchaser with a formal contract of Sale document consistent with the above terms”
  • “Upon acceptance by the Purchaser’s solicitor, the client agrees to enter into a formal legally binding contract.”

The Heads of Agreement was signed by Mr Green. A dispute later arose when the Heads of Agreement was construed as a binding and enforceable contract for the land sale by Count On Us.

Count On Us alleged that because an initial deposit of $100,000 (as provided for in the Heads of Agreement) had been paid, Hume Machinery was estopped from denying the existence of an agreement. Count On Us sought an order for specific performance requiring for the delivery of a contract of sale.

By contrast, Hume Machinery claimed that Mr Green, as a sole director, did not have the actual or implied authority to bind Hume Machinery. It was also argued that the Heads of Agreement did not carry contractual force and that Mr Green lacked the requisite intention to create a concluded bargain as required for an enforceable land sale agreement.

Considering The Authority

Mukhtar AsJ opened the analysis by stating that the purported agreement was unorthodox. Although entitled ‘Heads of Agreement’ it also stated that it was an ‘expression of interest’ by Count On Us for the property.

Count On Us identified the High Court authority of Masters v Cameron (1954) 91 CLR 353 as dealing with three types of agreements that may arise when parties agree that they are to enter into a further formal contract:

  1. The first occurs when parties have reached finality in the terms of their bargain and intend to be bound. The terms are to be restated more precisely but be of no difference in effect.
  2. The second occurs where parties have agreed on all terms of their bargain and intend not to depart from these terms, but performance is conditional upon the execution of a formal document. In such a situation, an immediately binding contract is on foot.
  3. The final situation occurs where there is no intention to make a concluded bargain until a formal contract is executed.

Count On Us argued the Heads of Agreement fell into the second category so as to give rise to an immediately binding contract. Mukhtar AsJ was not so persuaded. Particular attention was paid to the words “this is an expression of interest on the property”. Even in the event of mutual interest from the vendor, the Heads of Agreement was viewed as merely a business engagement intended to invite the delivery of a more formal document of sale.

Could A Signature On An ‘Expression Of Interest’ Amount To An Offer Capable Of Acceptance?

Count On Us then proposed an alternative argument. It was argued that once Mr Green signed the Heads of Agreement, it was converted into an offer from the vendor. This purported offer was then capable of acceptance by Count On Us through the tendering of the $100,000 deposit.

Mukhtar AsJ also rejected this argument. His Honour saw this as a forced construction of a category two agreement, in circumstances where it was better suited to a non-binding classification under category three. This analysis hinged on a clause stating that “upon acceptance, by the purchaser’s solicitor, the client agreed to enter into a formal legally binding contract”. This language was decisive in the finding that the Heads of Agreement would not be binding until a formal contract was prepared by the vendors:

“I do not see how there can be a revealed intention to have an immediately binding contract when the heads contemplate the coming into existence, possibly later on, of a formal legally binding contract”.

Commercial Rationale

Mukhtar AsJ’s rejection of a strict interpretation of the legal enforceability of the Heads of Agreement upholds a sense of commercial convenience. By preserving the meaning of the language that negates the existence of a binding agreement, parties to such pre-contractual documents maintain the flexibility to withdraw regardless of any further negotiations about the terms of the bargain.

Lessons To Be Learnt

This decision reminds parties to commercial contracts that the language used in any pre-contractual documents will be decisive in determining whether they hold legally binding consequences. Parties who do not wish to be bound by pre-contractual agreements should, therefore, exercise caution in ensuring that documents contain clear language to this effect.  Words indicating that a formal legally binding contract will be entered into at a later point in time will create a strong presumption that pre-contractual ‘agreements’ do not hold legally binding consequences.

When provided in the commercial property context, signatures on pre-contractual documents phrased in this manner will instead signify recognition of the purchaser’s interest in buying the property and a willingness to deal with a purchaser on terms included in a later binding contract.

If you require assistance preparing or reviewing a contract, please contact our Dispute Resolution and Litigation team by email or phone +61 3 8540 0200.