Is a Letter of Intent a binding contract?

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Prior to entry into a formal lease document, the Landlord and Tenant will often sign a preliminary document such as an “Offer to Lease”, “Agreement to Lease” or “Letter of Intent”.  If one party then pulls out of the leasing arrangement before the formal lease documents are signed, it raises the question of whether the preliminary document formed a binding legal contract between the parties.

A recent case before the Brisbane District Court, Colvin v Lennard & O’Brien [2012] QDC 71,Colvin v Lennard & O’Brien [2012] QDC 71, was decided in favour of the Landlord when it was held that the Letter of Intent signed by the Landlord and Tenant constituted a concluded lease contract, even though the Tenant pulled out of the arrangement prior to signing a formal lease document.  The Court ordered the Tenant to pay damages to the Landlord in excess of $100,000.00 plus interest and costs, which included compensation to the Landlord for lost rent revenue because the Landlord was not able to secure a replacement tenant until 6 months after the original Tenant pulled out.

Preliminary lease agreements can vary widely in their form and content.  For example they may:

  1. Unequivocally state that the document is intended as a concluded agreement, with execution of a formal lease by the parties being a mere formality; OR
  2. Unequivocally state that the document is not intended to be legally binding but rather is subject to negotiation of final terms and execution of a formal lease; OR
  3. Be silent on the issue of intention. In such a case, in order to determine the parties’ intentions, the terms of the document itself will be considered in light of the surrounding circumstances.  In the recent case mentioned above, because the Letter of Intent comprehensively identified all terms of the lease arrangement and used the language of a binding agreement, it was held to be a legally binding contract.

The moral to the story is to make sure that you know the effect of the document that you are signing, before you sign it.  The best way to do this is to obtain legal advice.  Otherwise it may turn out that the document that you thought was merely a lease application is in actual fact a binding contract to lease.

If you require advice on any leasing matter, either as a Tenant or a Landlord, please contact MMLaw.

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Disclaimer

The content published in this Blog is in the form of academic papers and the opinions expressed herein are generalised. The information provided is for educational purposes, not specific legal advice.

The application of any principles referred to can alter from case to case and accordingly you should seek independent legal advice in respect of your individual circumstances.

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