When entering into a lease, the landlord will often require you to sign a Heads of Agreement (HOA) prior to the formal drafting of the lease. It is important that you are aware of whether the HOA is binding or non-binding.
What is a Heads of Agreement?
A leasing HOA is a preliminary agreement that sets out the key commercial terms proposed to be included in the lease. It ensures the parties are aligned on matters such as the rent, outgoings, term length (including any option terms), the permitted use of the premises and security deposits/bank guarantees so as to avoid unnecessary negotiations during the lease drafting process.
Is your Heads of Agreement Legally Binding?
The principles established in Masters v Cameron (1954) 91 CLR 353 set out three possible arrangements for the binding nature of a HOA:
- The parties agree to be immediately bound by the agreed terms in the HOA and will enter into a formal lease at a later date;
- The parties agree to the terms contained in the HOA but the performance of those terms is subject to executing a formal lease; or
- The HOA contains proposed commercial terms only, and the parties do not intend to be legally bound unless and until a formal lease is executed.
The ruling in Masters v Cameron determined that the first two arrangements are legally binding on the parties as they demonstrate an intention for the parties to be bound.
What does this mean for you?
Although HOAs often appear informal, they can create legally enforceable obligations once signed. This can mislead parties into assuming they are not bound when, in fact, they may be.
It is important to carefully review whether the HOA expressly states that it is binding or non-binding, and which provisions (if any) are intended to have immediate legal effect.
Before you sign a HOA, and before your commercial obligations arise, it is important that you seek legal advice in order to protect yourself from unintended legal consequences.
