Lease negotiations: authority to act

Posted on Oct 28, 2019 by Terry Morgan   |   Categories: Commercial & Retailing Leasing

A recent decision of the Supreme Court of NSW in respect of a Lease highlights once again the necessity to ensure that in any negotiations enquiries are made and satisfactory responses received to ensure that the party with whom you are dealing has authority to enter into and conclude negotiations.

In the case in question a Lessor had, over a period of five (5) years during an existing Lease, conducted discussions regarding the property, the subject of the Lease, exclusively with the CEO of the Lessee.

The Lessor approached the CEO to discuss an arrangement pursuant to which the Lessee would offer to exercise the option contained in the Lease prior to the date established by the existing Lease for the exercise of the option by the Lessee.  In return, the Lessor would agree to certain reimbursements by the Lessee and the Lessor would effect certain works on the said property.

The Lessor reached agreement with the CEO of the Lessee regarding a new Lease.

Based upon that agreement, the Lessor went ahead and approved a refurbishment of the premises by the Lessee and undertook certain works itself.

The Lessee subsequently withdrew from the apparent agreement to enter into a new Lease of five (5) years.

Unfortunately, the dispute between the Lessor and Lessee proceeded to a hearing in the Supreme Court of NSW.

The Supreme Court of NSW held that, notwithstanding the established practise of the Lessor dealing with the CEO, that the CEO did not in fact, have the actual or implied authority to commit the Lessee to a legally binding agreement to commit to a further five (5) year Lease.

The court examined, amongst other things, internal procedural documents as to the authority given to the CEO by the Lessee company.

The court came to the conclusion that all of the material did not disclose an actual authority for the CEO to commit to any such agreement, nor was there any implied authority for the CEO to commit to any such agreement for the entering into of a new Lease.

Interestingly, the court also held that the approach by the Lessor to the Lessee to “bring forward” the time for the exercise of the option was in fact, actually a negotiation regarding a new Lease as the purported exercise of the option was not carried out during the period prescribed in the Lease.

The case highlights the requirement, in any negotiations, to ensure that in order to have a binding agreement, that the person or persons who are negotiating have authority to commit the other party to a legally binding arrangement.