Emails can be binding

Email negotiations are now a common form of correspondence in leasing and sales of property.

The parties or their agents often seek to reach agreement in an informal way about essential contractual terms by email. However, this informal form of negotiation may result in a binding agreement if care is not taken.

Why the words ‘subject to contract’ may not be enough

Recent cases send a warning to any party negotiating an agreement that using phrases such as ‘subject to contract’ may not be enough to show that you did not intend to be immediately bound by the terms of an agreement. In one case the court looked at an email in which the vendor’s agent said:

‘We accept the below offer which we understand will be subject to execution of the contract provided (with agreed amendments)…, minimal due diligence period and the provision of all information/reports etc. that are obtained by the purchaser during the due diligence period. We look forward to progressing the matter further….’

The court looked objectively at the words used by the parties and also the circumstances surrounding the emails. On an objective assessment, the court did not interpret the words ‘subject to execution of a contract’ to mean that the parties had no intention to be bound to the agreement until the sale contract was signed. Instead, the court found that the acceptance email from the vendor’s agent was consistent with the position that a contract had been formed and the parties were immediately bound to the agreement.

It is not just formal wording, such as ‘we accept the offer’ which can bind the parties. In a recent leasing case, the tenant sent an email during negotiations for a renewal of the lease which concluded by saying ‘(we are) happy with the terms of the proposal’ and then later ‘Please proceed with wrapping this up.’ The court again objectively looked at the circumstances of the matter and held that the emails between the tenant and the landlord’s agent amounted to an immediately binding agreement for lease, despite the fact that after the relevant emails, the parties continued negotiations as to the terms of the lease and no formal lease was ultimately agreed or signed by the parties.

In another recent leasing case, the court clearly noted that a ‘binding contract may be found even where some wording is used that would, but for context and circumstances, have indicated that no binding contract was intended.’ In that case, even though a formal lease had not been executed, the conduct of the parties was consistent with them having reached a legally binding agreement for the lease, with the expectation that they would enter into a further formal agreement in substitution for the first agreement.

What are the implications?

Regardless of your actual intentions, informal negotiations by email could amount to a binding agreement even where no formal contract or lease has been signed. Often letters of offer, heads of agreement or sales instructions have clear statements that no legally binding agreement will be entered into until the parties have executed final documents. However, the recent cases have shown that subsequent email exchanges which do not contain this clear statement may bind the parties to an agreement.

What should you do?

Emails are a convenient and effective way to communicate during negotiations. However, you should be careful about the contents of your email before hitting the ‘send’ button when negotiating a lease or sale contract. Be careful not to unconditionally agree to terms and conditions in emails unless you are prepared to be bound by them.

If it is intended that certain negotiations are not to be binding, then that should be clearly communicated at the outset and throughout negotiations by stating that you do not intend to be bound by the email until the formal written document setting out the final terms of the agreement concluded between the parties is executed. Remember, simply using the words ‘subject to contract’ may not be enough if objectively it looks like there is an intention to be bound to the agreement.

If you are unsure, seek legal advice before sending the email.

For more information contact the Property, Commercial and Finance Team:

Christine Murray — Partner — Property, Commercial and Finance Team
(02) 6279 4402

Jennifer Jaeschke — Senior Lawyer — Property, Commercial and Finance Team
(02) 6279 4361