When will a letter of offer, Heads of Agreement, or ‘handwritten napkin’ be legally binding in relation to a land sale in NSW?

As lawyers, we often see neighbours, friends, family members, or even strangers, reach an “agreement” for one of them to sell some land to the other, only for one of those parties decide to try to pull out of the agreement before formal Contracts (or Options) for the Sale of Land have been executed and exchanged.

The aggrieved party will then seek legal advice as to whether the initial “agreement was legally binding”.

No matter how large or complex the matter is, one must return to basic principles and ask:

1. Was there an offer?
2. Was there direct acceptance of that offer?
3. Was there an objective intention to create legal relations?
4. Was there “consideration” (a legal doctrine of ‘quid pro quo’ where each party must have agreed to do something for the other. For example, in sale of land, the vendor agrees to convey the land, and the buyer agrees to pay them)?

Then focus more specifically

5. Did the parties even have capacity to enter the contract?
6. Is the contract sufficiently certain, or is it void for uncertainty etc?
7. Have any relevant formalities been satisfied?

While as a starting off point, the element of writing is not a requirement for a contract law generally, it is a required element where a statute says so.

For sale of land matters, s54A of the Conveyancing Act 1919 provides that “no action or proceedings may be brought upon any contract for the sale ... unless the agreement upon which such action or proceedings is brought, or some memorandum or note thereof, is in writing, and signed...".

If there is no written initial agreement, there are still some ways the initial agreement can be legally binding. See further:

https://maclarens.com.au/news/737/when-will-a-land-contract-be-binding-without-being-evidenced-in-writing-part-performance-estoppel-and-the-nswca-taking-a-walk-down-old-waltons-stores-interstate-ltd-v-maher-lane

• WHEN does the contract become binding?

Heads of Agreement (a short summary of the key agreed terms, with the full contract yet to be drafted) are notoriously difficult to categorise as to whether they are legally binding or not.

There is a presumption in NSW that binding relations in a sale of land contract only arise when the full contracts of sale are exchanged: Allen v Carbone (1975) 132 CLR 528 & GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 63

But it is possible that this presumption be overcome if it is objectively apparent that the parties intended to be bound immediately on, say, the signing of a Heads of Agreement, or even an email exchange setting out the key terms: obiter in Hill v Newth [2014] NSWSC 298. And while the purchaser may have certain statutory rights of recission [see the Conveyancing (Sale of Land) Regulation], it may be that the vendor is bound to proceed with the sale.

With Heads of Agreement particularly, it may be the case that:

1. none of the items therein are legally binding until exchange of the full contract,
2. Some of the items are binding (e.g. the confidentiality clause),
3. All of the items are immediately binding and the exchange of a full contract is a “mere formality”, OR
4. All of the items are immediately binding but subject to an event happening (e.g. ‘this agreement is subject to the Property being re-zoned R4 High Density before [X] date’).

Noting the above, it would be ideal if the parties expressly set out in the Heads of Agreement exactly when they intend that the agreement be legally binding.

Unfortunately, it is often the case that the parties are either silent on this point, or unclear on this point.

When one party seeks to pull out of the agreement, it can become a dispute as to exactly when the agreement become or would become legally binding (if at all).

• Issue Revised in Urban Fortune Global Ltd v Deicorp Projects (Partridge Ave) Pty Ltd [2022] NSWSC 1352 & Urban Fortune Global Ltd v Deicorp Projects (Partridge Ave) Pty Ltd (No 2) [2022] NSWSC 1703

The Facts of this set of litigation can be summarised as follows:

1. Urban Fortune Global Ltd (UFG), and a second plaintiff (Polytec Australia One Pty Limited) claimed that they are entitled to purchase, for $45m, a set of 10 residential properties (the Properties) in Castle Hill held by Diecorp. The site is valuable as it has a DA to build 272 residential apartments.

2. UFG is a Due Diligence company. The second plaintiff, Polytec Australia One Pty Limited, was proposed as the ultimate buyer of the Properties.

3. In April 2022 the parties signed an ‘informal written agreement’ – the parties dispute that it is legally enforceable. (A further dispute as to whether it was indeed signed by Deicorp).

4. Two of the key terms of the ‘informal written agreement’ were that:

1. The Plaintiffs would be provided Due Diligence Period, and
2. The parties would “use best endeavours to negotiate the terms of a contract of sale”.

5. Deicorp then prepared a Contract for the Sale of Land.

6. On 14 May 2022, the solicitors wrote to UFG advised Deicorp’s solicitors that their client would be proceeding with the contract, and that they had some amendments to the draft contract.

7. A few days after that, “Deicorp PA’s solicitors advised that their client no longer wished to proceed with the sale, and relations between the parties broke down.”

8. The Plaintiffs claim that Deicorp was contractually obliged to proceed with the sale, and these proceedings were commenced in August 2021.

9. More specifically, the Plaintiffs claimed that:

1. Either Deicorp must specifically perform the Contract of Sale of Land with the amendments, or Deicorp must specifically perform a Contract of Sale of Land in a form the Court sees fit as the result of ‘good faith negotiations between the parties’ [Comment: this perhaps highlights the uncertainty of the claim]; or

2. Diecorp was liable for damages for $90 million. Ultimately the first claim was abandoned and only the claim for damages pressed.

10. It is important then to look at the actual document in question.

Document

11. The document in question was initially titled as “Indicative Letter of Offer and Exclusive Due Diligence Agreement. After some negotiations back and forth, the final letter was called “Letter of Offer and Exclusive Due Diligence Agreement”, dropping the word “Indicative”. (hereafter the “Letter”).

12. The content was as follows:

Subsequent draft Contract of Sale of Land

13. The lawyers for Diecorp prepared the draft contract with special conditions. The Purchaser details stated “TBC”.

14. The Plaintiffs sought to nominate the buyer as "Yung Hei Lam on behalf of Polytec Australia One Pty Limited (a company yet to be formed)". The Lawyers for the plaintiffs further:

1. Amended the contract to read “vacant possession”.
2. Removed the director’s guarantees.
3. Amended clauses about Diecorp’s first right of refusal for the construction work.
4. Amended the Foreign Investment Review Board clause to provide that the buyer would be approved by completion, rather than as at exchange.

15. Having paid 1% of the price for Due Diligence, the buyer then paid 9% (not 10%) and a further dispute arose in the proceedings about whether the 1% was separate to the deposit or to be credited as part of the deposit.

16. After some follow ups, Diecorp’s solicitor replied that their client would not be proceeding with the sale and the deposit would be refunded.

17. UFG’s solicitor asserted that Diecorp could not withdraw from the sale, and that they were in breach of contract, and had been misleading and deceptive.

18. Perhaps importantly, the actual buyer (the second plaintiff) was a company only formed a number of days later.

Legal Principles:

19. The Court formulated four key questions to address:

1. What exactly would “use reasonable endeavours to agree the terms of a Contract of Sale” involve?

2. Is that obligation contractually enforceable?

3. If it was contractually enforceable, was it set aside by the Conveyancing Act?

4. Was there a breach and what relief is available?

20. While everyone agreed that the Letter was poorly drafted, the presiding judge, HH Parker J accepted that the court should aim to give the agreement legal effect if possible, notwithstanding the poor drafting: WN Hillas & Co Ltd v Arcos Ltd (1932) 147 LT 503 (HL) at 514 per Lord Wright.

21. On the first question above, HH Parker J noted that such an obligation was an obligation on Diecorp to prepare and present a proposed contract of sale of land to the buyer as set out in the Letter, offering the property to that buyer.

22. Ultimately,  HH Parker J held that Diecorp satisfied their obligation, and that Diecorp did not have to proceed with exchanging the formal contract and proceeding with the sale. HH Parker J focused primarily on the fact that the nominated buyer, Mr Lam, was not a “Special Purpose Vehicle”. It is on this point that the case was ultimately decided. As the point had not properly been argued by the parties during the course of the first case, a second case (No 2) was had and equally determined that the Plaintiffs had not properly nominated a buyer to meet the description as set out in the Letter.

23. HH Parker J too focused on the issue of the Plaintiffs countering with amendments to the special conditions, but that case was decided on the first consideration above.

24. With regard to the question about whether that clause in the Letter (to “use reasonable endeavours to agree the terms of a Contract of Sale”) was even legally binding, HH Parker J determined that such a clause indeed can be contractually binding.

25. HH Parker J noted the decision of United Group Rail Services Ltd v Rail Corporation New South Wales (2009) 74 NSWLR 618, where a clause to negotiate disputes in good faith via meet and confer was held to be enforceable.

26. As to the Third Question (could the agreement be deemed void due to the Conveyancing Act provisions), HH Parker J held that the Conveyancing Act did not void this contractual obligation.

27. The Plaintiffs were alleging that the second plaintiff had an “option” to buy the property. But if so, would the Conveyancing Act deem the transaction to be void? First, the “option” could be exercised within 42 days (contrary to s66ZG). Second, the “option” did not have the prescribed documents attached (as required by s66ZI). Third, the “option” did not have the prescribed cooling off statement (as required by s66ZH).

28. Counsel for the plaintiffs rebutted that that only applies to residential land, and second that it was not an option for the purposes of the Act.

29. HH Parker J agreed that the land was not residential. While the individual lots were, collectively the 10 lots taken together did not meet the definition.

30. Diecorp failed on this point. The Conveyancing Act was held to not make this particular matter void.

31. Noting then that the clause was contractually binding, was it breached? As discussed in the paragraphs above, HH Parker J held that it was not breached. Deicorp had satisfied their contractual obligations under the clause and, having done so, were not further bound to proceed with the sale.

This litigation is a classic example of the complexities involved in contract law, and the need to obtain proper advice and proper drafting to achieve your desired outcomes. For contract law advice, please contact Maclarens Lawyers on 96823777.