One of the golden rules when entering into an agreement is to ensure that all the terms are recorded in writing and signed by the relevant parties. As the old saying goes, a verbal agreement is as good as the paper it is written on.
It sounds simple enough, but for various reasons it is not always possible to have a written agreement. If you are party to a contract where there is no signed written agreement, it is critical that you are aware of your rights and obligations and, more importantly, the effect of terminating the contract, especially if you reserve any of your rights and sue the other party for damages.
This was highlighted in a case where we acted for a tenant of commercial premises. The tenant had previously entered into a lease with the landlord that had been signed some years earlier. Prior to the expiry of that lease, the parties began negotiating terms of a new lease, however those negotiations never resulted in a final lease being executed. The lease subsequently expired and the tenant continued to occupy the premises on a monthly tenancy pursuant to the overholding provisions in the lease.
Notwithstanding that no agreement had been reached in relation to the terms of the new lease, the landlord mistakenly proceeded on the basis that the new lease was in force. Some eighteen months passed and the tenant vacated the premises, giving one month’s notice pursuant to the overholding provisions in the old lease. It subsequently undertook its make good obligations and terminated the lease.
The landlord maintained that the new lease was on foot. It served the tenant with a default notice (under the new lease) for failure to pay rent after it had already vacated the premises. Upon the tenant failing to pay the rent, the landlord elected to terminate the (new) lease. In the landlord’s default notice it referred to the new lease as a lease that was ‘partly in writing and partly oral’ and referred to the key conversations which it said constituted the agreement reached between the parties. However, there was no signed lease at the time the lease was terminated.
The landlord in this case faced an uphill battle on several fronts. Firstly, the grant of an interest in land must be in writing and signed by the parties. The fact that the landlord was seeking to enforce an implied lease meant that it had to rely on the equitable doctrines rather than on contract law. In other words, as there was no written contract in place it had to rely on equitable principles when seeking to enforce the lease. There was a second obstacle facing the landlord that made its claim almost impossible to succeed. In the proceeding, the landlord claimed damages for the ongoing rent it would have received had the tenant remained in the premises for the period of the new lease. The difficulty the landlord faced was that because it had terminated the lease prior to commencing the proceeding, it could no longer seek an order for specific performance of the lease or any future damages. The termination of the implied lease shut the door on the equitable remedies that may otherwise have been available. Even if the landlord could show the new lease was agreed, the landlord had terminated the lease. There was no basis for the landlord to sue for future damages.
The landlord would have been in a much stronger position if:
- it had a written agreement with the tenant in terms of the new lease; or
- it had not terminated the lease prior to commencing the proceeding.
Theoretically, if the lease was still on foot when the landlord commenced the proceeding, the landlord could have argued that it was entitled to ongoing rent if it could prove that an equitable lease existed.
Needless to say, the claim was resolved on very favourable terms to the tenant. However, this is an important lesson for all parties to contracts which are not signed or in writing to obtain legal advice prior to terminating the contract so as to ensure that one’s rights are preserved for any future damages claim or litigation.
This article originally appeared in the Spring 2016 edition of InDispute. Other articles in this newsletter include:
- Employees leaving – IT forensic accountant and confidentiality
- Retail Leases Act – Reminder expiry clauses
- Getting the terms of trade right – lessons for traders
- Battle of the ‘big yellow box’: Chemist Warehouse loses appeal
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