How does a court determine whether the negotiations for a lease have ceased and agreement has been reached?

In BBB Constructions Pty Ltd v Aldi Foods Pty Ltd [2012] NSW 224, the New South Wales Court of Appeal considered the situation of parties that had been involved in lengthy negotiations relating to an agreement for lease. Ultimately, the potential tenant walked away from the negotiations, and the potential landlord/ developer sued.

The Court had to decide whether negotiating parties can assume they are bound to an agreement prior to the final signing and exchange of documents.

If parties engage in lengthy negotiations, both in writing and orally, it can be very difficult to know whether they have actually reached an agreement. The courts have concluded that once the negotiations reach agreement on all primary terms (for example, in a lease that would mean the parties, the property, the price and the period of the lease), there is a binding agreement.

In this particular case, Aldi Foods P/L, entered into negotiations with BBB Constructions Pty Ltd, which owned a parcel of land that had been approved for a residential and commercial development. Aldi proposed that it would lease a part of a building on the site that was not in fact part of the original design for the site.As a part of its proposal, Aldi wrote: 'this offer is subject to Aldi board approval'.Aldi and BBB then negotiated extensively to try and finalise an agreement for lease.

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While the parties were still negotiating, BBB actually commenced construction works on the site and spent significant amounts of money accommodating Aldi's requirements. Throughout the negotiations, Aldi's negotiator stated a number of times to BBB that the agreement for lease would be signed imminently.

Despite final copies of the agreement for lease being sent by BBB's lawyers to Aldi in May 2007, a number of issues remained outstanding.

Possibly due to frustration with the progress of the negotiations, in May 2007, after months of negotiations, BBB entered into preliminary discussions with Aldi's competitor IGA. However, the discussions went nowhere.

In July 2007, BBB's lawyers once again sent final documents to Aldi. Aldi's board did not approve the proposal and informed BBB that it would not be proceeding with the agreement for lease.
BBB sued Aldi alleging it mislead or deceived BBB or its conduct was unconscionable.

In dismissing BBB's appeal from the dismissal of its claim by the NSW Supreme Court, the Court of Appeal (Basten and Barrett JJA and Sackville AJA) unanimously held that:

• BBB was not misled or deceived because the purpose of the ongoing negotiations was to produce an agreement for lease that was acceptable to both parties and that BBB knew that Aldi's board's approval was a pre-condition to Aldi's commitment. Further, BBB's conduct in relation to its dealings with IGA were not consistent with BBB's argument that it had relied on Aldi's alleged misleading and deceptive conduct;
• BBB had not been induced into believing that an agreement for lease would be executed, as both parties displayed a mutual assumption that the negotiations would continue until a final agreement was produced, and that each party would then make a final decision as to whether they would preceded; and
• as the parties were commercially sophisticated businesses who had employed lawyers to safeguard their own interests, any expense incurred by BBB in constructing the basement (which was to be occupied by Aldi) was for BBB's own commercial advantage. Accordingly, Aldi's conduct was not unconscionable.

Conclusion
When engaging in negotiations of any kind, it is important to recognise that you may become legally bound to the deal if you are not extremely careful in addressing the issue of when you have reached an agreement.

It is always a good idea to state in writing early for example "We will not be bound by any agreement until formal documents are signed and exchanged".