As published in CK Momentum Issue 2 (Click here to download)
Due to the commercial imperatives of property dealings, parties may try to "lock" in an agreement by signing letters of offer or heads of agreement. In
a strong competitive property market, contracts may also be signed and exchanged via email.
Property & Projects Partner, Bernard Tan, looks at whether these informal arrangements are binding on the parties?
While each case will depend on its circumstances, there are a number of "rules of thumb" that property developers and investors should keep in mind when
trying to secure a transaction under a "pre contract" arrangement:
- DON'T ASSUME THAT INFORMAL AGREEMENTS ARE BINDING EVEN IF THEY SAY THEY ARE: There is a presumption by the Courts that such informal arrangements are
not binding. They will often not comply with specific State based property law requirements such as mandatory disclosure, which may give rise to
rescission rights. If you wish to lock in a deal, then don't count on your informal arrangement to be legally binding.
- IF YOUR AGREEMENT CONTAINS the words “subject to formal contract”, then the court is likely to find the agreement is not binding.
- DOES THE AGREEMENT CONTAIN ALL MATERIAL TERMS? For pre contract arrangements to be binding, not only must the parties state their intention that
they are binding, but they must contain all essential terms of the agreement including the correct names of the parties, the property description,
price, settlement date and any special conditions.
- HAS A DEPOSIT BEEN PAID? For an agreement to be binding, it is likely that a deposit will be required to be paid.
- IT'S BETTER TO SIGN AND EXCHANGE CONTRACTS PERSONALLY: While emails allow parties to enter into contracts almost instantaneously, there is no substitute
for signing contracts in person. Problems have arisen when emails have not been received, parts of documents have gone missing or are not identical
or when only execution pages have been sent (not complete contracts).
- EXCHANGING CONTRACTS VIA EMAIL: When it is not possible for parties to meet in person, electronic transactions legislation introduced in each of the
States have made it possible for business to be carried out electronically. When emailing documents, the parties should state in their document
that contract exchange and communications may be effected electronically. Importantly, electronic exchange of the whole contract should be made.
- EXCLUSIVE DEALING: If you wish to enter into a binding agreement before finalising a formal contract, then you should consider entering into an exclusive
dealing arrangement. These arrangements do not have to comply with statutory requirements for the sale of property but require the parties to deal
exclusively with one another during an agreed period. A breach of the agreement can give rise to damages claims.
Finally, documents should correctly reflect the intention of the parties, particularly whether they intend to be bound or not. If parties wish to be bound,
then they should ensure that the documents are correctly drafted. If essential terms have not yet been agreed, then parties should consider other binding
arrangements such as an exclusive dealing arrangement.
ClarkeKann is a commercial law firm with offices in Brisbane and Sydney. Our expertise covers commercial & corporate transactions, employment & IR, financial services, litigation, risk management and insolvency, property transactions and resources projects, across a range of industries. For a full list of our legal services, please visit our website at www.clarkekann.com.au
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