Darzi Group Pty Ltd v Nolde Pty Ltd

BATHURST CJ: I have had the advantage of reading the judgments of Basten JA and Emmett AJA in draft. I agree with the orders proposed by Emmett AJA.

Emmett AJA has set out the relevant facts and submissions of the parties. In the circumstances, I am able to state my reasons for agreeing with the orders he proposes relatively shortly.

As Emmett AJA has pointed out, the critical question is whether by the exchange of letters between the respective parties’ solicitors of 27 May 2016 and 31 May 2016, the contents of which are set out in his judgment at [97] below, the parties entered into a binding agreement for the grant of a lease. It was common ground between the parties that at that time, all the terms of the proposed lease had been agreed upon as the last outstanding matters, the commencement date and the term of the lease had been resolved in the exchange of correspondence between the solicitors for the parties of 27 and 31 May 2016.

In Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540, Gleeson CJ set out the principles to be applied in cases of this nature. He pointed out at 548 that the question is different to whether the parties had reached agreement on such terms as are legally necessary to constitute a contract. He pointed out at 549 that “[w]here … the communications which the parties have exchanged are in writing, the question of their ‘intention’ is, prima facie, to be resolved objectively, and as a matter of construction of the relevant documents” and at 550 that where “[t]he case involves the objective determination of the intention of the parties from a consideration of a series of communications exchanged by them in the context of their dealings over a period of time … it is both appropriate and necessary to have regard to the commercial circumstances surrounding the exchange of the communications and, in particular to the subject matter of those communications” (see also Pavlovic v Universal Music Australia Pty Ltd (2015) 90 NSWLR 605; [2015] NSWCA 313 at [15], [64]-[72] (‘Pavlovic’)).

In considering the question, reference may be made to conduct and correspondence subsequent to the alleged making of the contract for the purpose of showing whether or not either party intended to be bound “until a formal contract had been drawn up embodying all the matters incidental to a transaction of such a nature”: see Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd at 547-548 and the cases there cited; Pavlovic at [118].

Further, I do not think that there is any particular presumption in the case of agreements for lease to the effect that such agreements are not binding until a formal exchange of agreements has taken place. Although there may be such a presumption in the case of contracts for the sale of land, see Eccles v Bryant and Pollock [1948] 1 Ch 93 at 99; Sindel v Georgiou (1984) 154 CLR 661 at 667-668; [1984] HCA 58, there is no authority that such a presumption exists in respect of agreements for lease. Such presumptions are to be discouraged: Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95; [2002] HCA 8 at [26]-[27].

In the present case, the context is important. On 13 October 2014, each of the parties executed two documents entitled “Heads of Agreement”, each of which were identical except that one provided for a bond of one month’s rent and the other for a bond by way of bank guarantee in an amount of $25,000. The documents also described as Deeds of Agreement did not state that they were not binding nor subject to the execution of a formal lease.

No argument was addressed on whether the Heads of Agreement could be specifically enforced and it is unnecessary to determine that matter. On 20 October 2014, the appellant (Darzi) entered into possession of the premises. The primary judge was correct in concluding that pursuant to s 8 of the Retail Leases Act 1994 (NSW), a retail shop lease was entered into at least by that date with the rent being $2,000 per week (exclusive of GST) or 12% of turnover (whichever was greater) (PJ [202]-[203]).

Although her Honour did not make any finding as to the term of the lease, the effect of s 16 of the Retail Leases Act 1994 as it then stood, was that the minimum term was five years (assuming that the term set out in the Heads of Agreement was not enforceable).

As Emmett AJA pointed out, after some delay, the solicitors for the respondent (Nolde) on 27 May 2015 forwarded a draft lease to the solicitors for Darzi. The draft lease was for a term of three years with an option to renew for a further period of 2 years.

The solicitors for Darzi responded on 11 June 2015 asserting that the draft lease was not in accordance with the Heads of Agreement, requesting that the term be five years with three five year options to renew and seeking certain other amendments.

Thereafter negotiations continued. Darzi, whilst being prepared to negotiate, only did so without prejudice to its rights under the Heads of Agreement (see, for example, the letters from Pigott Stinson, the solicitors for Darzi, to O’Brien Connors & Kennett, the solicitors for Nolde dated 22 March 2016 and 22 April 2016).

Importantly the letter from Pigott Stinson to O’Brien Connors & Kennett of 16 May 2016 contained the following comments:

Thereafter the correspondence, which was said to constitute the agreement, took place.

Thus the negotiations took place in the context of a dispute between the parties as to Darzi’s entitlement under the Heads of Agreement, in particular but not exclusively, as to the term of the lease. At all times Darzi, through its solicitors, negotiated on the basis that it was without prejudice to its rights under the Heads of Agreement should the negotiations break down. The context is very different to the situation where negotiations are taking place between a prospective lessor and lessee as to the terms of a new lease.

In these circumstances, I am of the view that a binding agreement for lease came into existence on 31 May 2016 when the last outstanding item had been agreed. As was pointed out by Gleeson CJ in Australian Broadcasting Corporation v XIVth Commonwealth Games at 548, that “as a matter of fact and commonsense, other things being equal, the more numerous and significant the areas in respect of which the parties have failed to reach agreement, the slower a court will be to conclude that they had the requisite contractual intention”. In the present case, the matter falls to be considered in circumstances where all items had been agreed upon.

It is true that on 7 June 2016, the solicitors for Darzi proposed that the parties “exchange the signed leases as soon as possible”. It may be argued that that statement and the fact that the letter was headed “without prejudice”, suggested that it was at least Darzi’s intention that the parties not be bound until the signed leases were exchanged. However, that comment must be read in the context of the second statement in the letter, “upon receipt of the original lease signed by our client, we will send the same to you to arrange for signing by your client so that you may attend to registration of the lease”. Having regard to the term of the lease, it was hardly surprising that Darzi would seek to have a lease in registrable form and registered in accordance with the provisions of the Real Property Act 1900 (NSW). It does not alter my view that the parties in the present case intended to be bound once the dispute concerning the term of the lease was compromised.

The conclusion which I have reached is supported by what occurred subsequent to the exchange of the letters the subject of the agreement. Basten JA has summarised these events at [51]-[53] of his judgment and as his Honour indicated they support the conclusion that a binding agreement was reached on 31 May 2016.

In these circumstances, the orders proposed by Emmett AJA should be made.

BASTEN JA: In October 2014 the respondent Nolde Pty Ltd, the owner of the Dorsal Hotel, Forster, sought to let premises in the hotel operated as a restaurant. On 13 October 2014 the principal of Nolde, Mr Koorey, met with Mr Darzi, who ran a restaurant business through a company, Darzi Group Pty Ltd trading as “The Sicilian”. Mr Koorey and Mr Darzi signed heads of agreement pursuant to which Darzi Group would obtain a lease of the restaurant premises for a period of five years, with three five year options. “Occupation/possession” was fixed to commence on 14 October 2014. Rent was stated to be $2,000 per week (excluding GST) or 12% of turnover, whichever was the greater. There was also provision for payment of an additional sum on account of outgoings.

Darzi Group immediately entered into occupation and started renovations of the restaurant. The restaurant opened its doors in early December. The first payment of rent was made on 3 December 2014.

The parties then engaged in lengthy negotiations, through their respective solicitors, with respect to the terms of a lease. The final substantive issue to be resolved was the period of the lease and any option to renew. On 27 May 2016 solicitors for Nolde advised the solicitors for Darzi Group that Nolde was agreeable to a lease commencing on 1 December 2014, to run for five years with an option for a further five years and three months. On 31 May Darzi Group’s solicitors responded noting that their client agreed to a lease commencing on 1 December 2014 for a term of five years and an option of five years and three months. They stated that they would amend “the lease as agreed” and would submit a final lease for Nolde’s execution by Friday, 3 June. By email on 3 June, a final lease was forwarded for execution.

There appears to have been a telephone conversation the next Tuesday, 7 June, between the solicitors, as a result of which a new plan of the premises was attached to an updated lease referring to the new plan. The solicitors for Darzi Group indicated where the changes had been made and stated:

On 15 June 2016 Darzi Group’s solicitors again wrote enclosing, relevantly, (i) a counterpart lease duly executed by Darzi Group; (ii) a registration copy duly executed by Darzi Group, and (iii) a cheque in favour of “LPI-NSW”, being the registration fee on the lease. The letter also asked for delivery of a counterpart executed by Nolde “for our records at your earliest convenience.” It also sought, in due course, a copy of the registered lease.

Darzi Group alleged that an agreement on all the terms of the lease, and the final form of the document, had been reached either by 31 May 2016, or no later than 7 June 2016.

No counterpart was executed by Nolde; the registration cheque was not returned; letters from Darzi Group’s solicitors on 18 July 2016 and 18 August 2016, seeking return of the signed counterpart, obtained no response. Later in 2016 Nolde made a claim for payment of a proportion of outgoings on the property, but without a proper statement of supporting information. Finally, on 18 October 2017, a final letter was sent seeking a copy of the lease for registration. When that did not occur by the date identified in the letter, Darzi Group lodged a caveat on the title, on 10 November 2017. On 24 January 2018, Nolde responded that there could be no dialogue between the parties until the caveat was removed. On 29 May 2018, Darzi Group commenced proceedings in the Equity Division, seeking a declaration of a lease in the terms agreed on or around 27 May 2016 and set out in the form of lease forwarded to Nolde’s solicitors on 7 June 2016. Further, the summons sought an order that Nolde execute the lease and, in default, that the Registrar be empowered under s 94 of the Civil Procedure Act 2005 (NSW) to execute the lease.

In circumstances more fully set out by Emmett AJA, the trial judge (Henry J) dismissed the summons in a judgment delivered on 29 March 2019. [1] I agree with Emmett AJA that the appeal should be allowed, the judgment below set aside, and consequential orders made as sought by the appellant (Darzi Group). However, as we are departing from a carefully reasoned judgment in the Court below, I will explain briefly my reasons for reaching a different conclusion.

Negotiations about the terms of the lease took place against the background provided by the Retail Leases Act 1994 (NSW). This was recognised by the parties in the course of their negotiations. For example, at one stage a draft “lessor’s disclosure statement” was prepared in a form required under s 11 of the Act. Secondly, the Act contained prohibitions, protective of the lessee, including a requirement that a lease be for a term not less than five years. [2] By way of cross-claim, Nolde sought a declaration that there was no lease agreement (and, in effect, that the Retail Leases Act did not apply) and, that Darzi Group occupied the premises as a monthly tenant, in accordance with s 127(1) of the Conveyancing Act 1919 (NSW), terminable on one month’s notice.

The trial judge held that the Retail Leases Act did apply and refused to make the declaration sought by Nolde.

For the Act to apply, it was necessary that there be a “retail shop lease” or “lease” as defined in s 3 of the Retail Leases Act, in the following terms:

A “retail shop” is defined in Sch 1 of the Act and includes a restaurant. Some shops and some leases are excluded from the operation of the Act, including short term leases, but it was not suggested that these provisions were relevant. [3] The trial judge correctly held that the premises constituted a “retail shop” for the purposes of the Act.

Nolde disputed, however, that there was a “retail shop lease”, relying upon ss 7 and 8, which provide as follows:

At trial Nolde contended that, because Darzi Group had not entered into a retail shop lease, it had not taken possession of the restaurant “as lessee under the lease” for the purposes of s 8(1). The trial judge observed that that construction of s 8(1) would render the apparent breadth of the definition of retail shop lease largely ineffective. As the trial judge correctly concluded, s 8 is directed to the temporal issue, namely when the lease is deemed to have commenced. [4]

There was no dispute that the appellant had a right of occupation of premises for the purposes of use as a restaurant, in accordance with the heads of agreement. That document specified a rental payment. The existence of any agreement of the kind identified (of a right of occupation of premises, for value, for the purpose of use as a retail shop) falls within the concept of a “lease” or “retail shop lease” as used in the Retail Leases Act. The definition of “retail shop lease” in s 3 of the Retail Leases Act was therefore engaged. The Act uses the term “lessor” to mean a person who grants or proposes to grant such a right of occupation, and “lessee” as the person who has the right to occupy. The document entitled “heads of agreement” was, therefore, a “lease” for the purposes of the Retail Leases Act and, being executed before the lessee entered into possession, commenced on the date it was executed: s 8(2).

The trial judge made the following findings with respect to the operation of the Act:

However, no consideration was paid to these findings in determining whether parties had entered into a lease under the general law. Nor was further consideration given to the Retail Leases Act in addressing what happened in May and June 2016. The judge concluded:

The conclusion was expressed in the following three paragraphs:

On the one hand, the facts that the parties had formed legal relations and were parties to an extant lease were ignored in this analysis. On the other hand, the effect under the Retail Leases Act of these negotiations and “consensus” on key terms was also ignored.

It is convenient to dispose first of two possible infelicities of the language of [125]. First, the reference to an intention to form relations was not intended to suggest that this was other than a commercial arrangement between the parties. Rather, it addressed the issue of whether the parties intended to be bound by the newly agreed terms, before execution by each of a formal lease agreement. Secondly, the term “consensus” appears to have crept into the discourse from two judgments of Hodgson CJ in Eq, namely Whiteway House (No 199) Pty Ltd v Abrocoona Pty Ltd [6] and Aspromonte Pty Ltd v Zagari. [7] The term “consensus” is a departure from the language of the definition of “retail shop lease” in s 3 of the Act, which refers to “any agreement”. The use of the term “consensus” is potentially misleading, because it may be understood as encompassing an agreement on all aspects of the arrangement. The Act applies wherever there is an agreement under which a person grants or agrees to grant a right of occupation, for value, of the kind described in the statutory definition. In other words, the Retail Leases Act is engaged by an agreement which may be incomplete in particular respects.

That being so, the first question must be to determine the effect of the Retail Leases Act on a variation of the terms originally agreed. The intention to enter into a formal lease agreement was present when the document containing the heads of agreement was executed on 13 October 2014; the fact that no formal lease was executed at that time did not stop the Retail Leases Act operating at that time. It follows that the absence of an executed lease will not affect the operation of the Retail Leases Act with respect to the 15 June document, setting out the terms of the agreement reached at that stage. Was there, by 15 June 2016, a fresh agreement in substitution or part substitution for the heads of agreement, or a variation of the heads of agreement? These essential questions were not addressed before the trial judge, or in this Court.

One indicator as to the operation of the Act in such circumstances is to be found in the various provisions dealing with renewal of a lease. That term is defined in s 80:

The parties appear to have assumed that the obligations under the Act only operated once a formal lease had been executed. Thus it was proposed that the lessor provide a disclosure statement under s 11 when providing an executed copy of the lease. However, such a statement is required prior to a retail shop lease being entered into: s 11(1). That arguably refers to the date on which an agreement constituting a retail shop lease is entered into, in this case 13 October 2014. Such a statement is also required where the lease is entered into by way of “the renewal of a lease”: s 11(4). The better view may be that a renewal occurs at or shortly prior to the termination of the lease: this was not what was envisaged in May/June 2016.

However, where there is an agreement which changes the term of the lease and the financial obligations of the lessee under the lease, there may well be a fresh agreement for the purposes of the definition of “retail shop lease”. Such a possibility appears to be envisaged by the express exclusion of certain cases from the minimum five year term provided by s 16: see s 16(4).

Given the manner in which the proceedings were conducted these questions must be put to one side. Nevertheless, the existence of a legally enforceable retail lease at the time the negotiations were taking place was a fundamental element of the context in which they took place.

The question addressed by the trial judge was whether the agreement of 15 June was intended to have effect immediately, in accordance with the agreed terms, or was only to take effect upon the mutual execution of a formal lease, which had been prepared and transmitted to the lessor.

Such questions are commonly answered by reference to a classification of contracts and agreements identified in Masters v Cameron. [8] It is not entirely clear if such a classification is applicable with respect to an agreement covered by the Retail Leases Act. Assuming that such an approach is applicable, this was not a case in which the contract fell within the first class identified in Masters v Cameron, nor the fourth class identified by McLelland J in Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd. [9] That is because, while it was true that the parties had reached finality in agreeing the terms of their bargain and intended to be immediately and exclusively bound by the terms, there was no intention that the terms be restated in some other form, nor that there would be a further contract, containing additional terms, in substitution for the first contract. The characterisation fell into the second or third classes; the appellant argued that this was a contract “binding the parties to join in bringing the formal contract into existence and then to carry it into execution”. The respondent contended that the case fell within the third class, namely an agreement as to which “the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.”

In the present case, the purpose of executing a lease in registrable form was to allow the lessee the opportunity to protect its interest in the land by registration of the lease. The purpose involved no variation of any term of the agreement, nor any necessary qualification of the completeness of the agreement. There was no express identification on the part of the lessor, in the course of its correspondence, of any requirement that no contract would take effect until a formal lease had been executed by it. It was at all stages Darzi Group which referred to the need for a formal lease. [10] In each case Darzi Group referred to its difficulties with respect to operating its business in the absence of a formal lease. The correspondence from Darzi Group’s solicitors did not suggest that an executed lease was required in order to achieve an agreement, but so that it could protect its interest in the land.

The fact that the lessee was pressing for such a document to protect its interests did not mean that the correct understanding of the lessee’s conduct was that there was to be no agreement until such a document was executed. The conduct of the lessor was silent on this issue.

As noted above, the trial judge was satisfied, correctly, that agreement had been reached on all the terms of the proposed lease document. According to the objective theory of contractual completion, an uncommunicated reservation on the part of one party will not prevent the conclusion of the contract. [11] There was no communication by the lessor that it would not treat itself as bound by any agreement until it had executed a formal lease document.

In my view, those considerations are conclusive. However, there are further matters which support that conclusion. It is often said that “post-contractual conduct is relevant to the question of whether a contract exists, although not to the question of what it means”. [12] The term “post-contractual” is unintentionally circular: the principle was better expressed by Beazley P in Pavlovic v Universal Music Australia Pty Ltd [13] by reference to “subsequent conduct of parties to determine whether, at an earlier juncture, the parties intended to enter into a binding agreement”. [14]

First, there was no suggestion by the lessor, in response to receipt of the executed lease, that the parties did not have an agreement. Indeed, the lessor did not respond at all. It is clear that saying nothing at all for a considerable time can give rise to an inference that a party has accepted that there is a binding agreement. This was not a case where there had been silence following an offer: it was a case where silence followed an express acceptance of the lessor’s offer on the last term in dispute. [15] Indeed, at no stage prior to the commencement of proceedings did the lessor deny the existence of a valid agreement arising in June 2016.

Further, the lessor (i) accepted rent payable in accordance with the terms of the 15 June 2016 agreement, including in accordance with increases that took effect at the end of the three calendar years 2016, 2017 and 2018; [16] (ii) took active steps to have the nominee of Darzi Group replace it as licensee of the premises; (iii) without giving details of its calculations, sent a demand for payment of outgoings, partly calculated on the basis of the proportion provided in the agreement of 15 June 2016, and only in that agreement, and (iv) accepted a payment by Darzi Group in good faith towards the outgoings, despite its failure to provide the basis of the calculations. Finally, although the amount in issue may be trivial, the lessor has at all times retained the cheque payable for registration of the lease, forwarded to it with the executed lease. The last action supports the inference that Nolde accepted its entitlement to retain the cheque for the purpose for which it was proffered, namely its agreement to execute and register the lease.

On the other side of the record, Darzi Group took out public liability insurance in accordance with the agreement and made the payments noted above.

It is true, as noted by the trial judge, [17] that some steps were consistent with the heads of agreement; but if it were to be inferred that the lessor was acting on that basis, rather than pursuant to a subsequent variation of that agreement, it must presumably be conceding that it was bound to provide three five-year options as required by the heads of agreement, rather than the one period of five years three months required under the June agreement. In any event, both the timing of the conduct (after 16 June 2016) and the apparent reliance on rental increases under the new agreement, militate in favour of the inference for which the appellant contended.

In my view, all of these facts should be taken into account in support of the conclusion that the lessor considered itself bound by the terms of the June 2016 agreement and that it constituted a binding agreement in substitution for the lease under the heads of agreement of 13 October 2014, as given effect by the Retail Leases Act.

EMMETT AJA:

The Premises are located on the ground floor of a hotel known as “The Dorsal” (the Dorsal Hotel), which is situated in West Street, Forster. The hotel and the land on which it is erected are owned by Nolde. A restaurant business known as “The Sicilian” is carried on in the Premises.

In early October 2014, Mr Maurice Koorey, a director of Nolde, placed an advertisement on a website advertising the restaurant business at the Dorsal Hotel for sale or lease. Mr Ahmed Darzi, the sole director of Darzi, responded to the advertisement and expressed his interest to Mr Koorey. On 13 October 2014, Mr Darzi and Mr Koorey met at the Dorsal Hotel and signed two copies of a printed pro forma document that had been prepared by Mr Darzi (the Heads of Agreement). The copies of the Heads of Agreement included handwritten details and changes inserted by Messrs Koorey and Darzi at the meeting, although the handwritten details differed as between the two copies. The differences are not material.

While the printed Heads of Agreement was not executed as a deed, it began as follows:

The Premises were identified in the first item and “Permitted Use” was stated to be “Licensed Restaurant”. “Start Date” was amended to say “Occupation/Possession” and the date was amended to “14th October 2014 … with 1 month rent free setup period”. “Rent” was specified as “$2,000 per week (Exclusive of GST) OR 12% of Turnover, whichever is greater”. The item “Outgoings” specified “To be additional to rent … % pro rata”, with the words “To be advised” handwritten in the blank space. In relation to the items for “Lessor works” and “Lessee”, the printed Heads of Agreement stated:

The item for “Term” was completed in the printed form with the following:

In his affidavit of 29 May 2018, Mr Darzi said that, on or around 20 October 2014, with Mr Koorey’s permission, Darzi entered into occupation of the Premises and started renovations and fit out of the Premises. He said that, after a rent free period, Darzi commenced paying a monthly rent to Nolde.

In his affidavit of 2 August 2018, Mr Koorey said that at the time of the execution of the Heads of Agreement, Mr Darzi said to him words to the following effect:

Mr Darzi said in a second affidavit of 18 September 2018 that, at the meeting on 13 October 2014 when the Heads of Agreement was signed, Mr Koorey said words to the following effect:

Mr Darzi was cross-examined on his affidavits. However, Mr Koorey was not cross-examined. Ultimately, the primary judge accepted Mr Koorey’s evidence to the extent that it was inconsistent with Mr Darzi’s, although her Honour did not find that Mr Darzi was deliberately untruthful. It is common ground that, on 20 October 2014, Darzi entered into occupation of the Premises and thereafter carried out renovation and fit out works. There was a dispute as to the extent to which Nolde authorised the renovations and alterations that were carried out by Darzi. In the result, nothing turns on that dispute. In any event, the restaurant was closed for about four weeks while the renovation and fit out works were carried out. In late November or early December 2014 Darzi commenced operating the restaurant business in the Premises. From 3 December 2014, Darzi paid monthly rent to Nolde of $9,533.32, including GST, which equated to the figure for rent referred to in the Heads of Agreement.

Through the medium of their respective solicitors, a protracted period of negotiation between Darzi and Nolde followed thereafter, culminating in a letter from Nolde’s solicitors to Darzi’s solicitors of 27 May 2016 saying that Nolde “is agreeable to a lease with a term of 5 years with an option of 5 years and 3 months commencing on 1st December 2014”. Darzi’s solicitors responded to that proposal by a letter dated 31 May 2016 saying that Darzi “agrees to a lease commencing on 1 December 2014 with a term of five years and an option of 3 years and 3 months”. A form of lease was sent by Darzi’s solicitors to Nolde’s solicitors on 7 June 2016. That form of lease was executed by Darzi and sent to Nolde’s solicitors on 15 June 2016 (the 15 June Document). The 15 June Document was not executed by Nolde.

By Summons filed on 29 May 2018, Darzi claimed, relevantly, a declaration that Nolde, as lessor, and Darzi, as lessee, had entered into a retail lease in respect of the Premises, the terms of which were contained in the 15 June Document. By its cross claim filed on 28 November 2018, Nolde claimed a declaration that there was no concluded or binding lease or agreement for lease between Nolde and Darzi in respect of the Premises, a declaration that there was a periodic tenancy from month-to-month between Nolde and Darzi in respect of the Premises and a declaration that Nolde is entitled to terminate the tenancy by giving one month’s notice to quit the Premises.

On 29 March 2019, the primary judge ordered that Darzi’s summons be dismissed with costs and that Nolde’s cross claim be dismissed with costs. Her Honour concluded that, while there was no binding agreement for lease on the terms of the 15 June Document, [18] a retail shop lease under s 8 of the Retail Leases Act 1994 (NSW) (the Leases Act) had come into existence on 20 October 2014, the day on which Darzi entered into occupation of the Premises. [19] The result was that Darzi would enjoy a term of five years from the date Darzi entered into possession, being 20 October 2014, but with no option for a further term. [20] Nolde does not dispute that finding.

Before dealing with the reasons of the primary judge, it is necessary to describe in more detail the course of communications between the solicitors for the parties that culminated in the 15 June Document being executed by Darzi. After dealing with her Honour’s reasons, I shall deal with the grounds of appeal relied on by Darzi and the contention relied on by Nolde.

On 18 February 2015, Messrs Paton Hooke Lawyers (Paton Hooke), who were then acting for Darzi, wrote to O’Brien Connors & Kennett, who were acting for Nolde, saying that it was some time since Darzi had been in possession of the Premises and there was “still no Lease”. Paton Hooke asked for advice as to O’Brien Connors & Kennett’s instructions in relation to Nolde’s intention in that regard. That letter was followed by an email on 4 March 2015 saying that Darzi would like to have the arrangements between it and Nolde “formalised in a lease as soon as possible”.

On 27 May 2015, O’Brien Connors & Kennett sent a draft lease to Paton Hooke “for your client’s approval”. Paton Hooke wrote back to O’Brien Connors & Kennett on 11 June 2015, noting that the draft lease was for a retail shop within the meaning of the Leases Act and requesting that “disclosure statements” be provided. The letter also said that the draft lease had not been prepared in accordance with the Heads of Agreement and that Darzi had carried out extensive renovations with Nolde’s knowledge and consent based on the Heads of Agreement. Paton Hooke requested a number of amendments and further information in relation to the draft lease.

The reference in the letter of 11 June 2015 to “disclosure statements” was a reference to a requirement of the Leases Act. Section 11 of the Leases Act provides that, at least seven days before a retail shop lease is entered into, the lessee must be given a disclosure statement for the lease that contains certain information [21] and is accompanied by material that is prescribed. If a lessee is not given a disclosure statement in accordance with that requirement, or if the disclosure statement that is given is incomplete, or information given is materially false or misleading, the lessee may terminate the lease by notice in writing to the lessor at any time within six months after the lease is entered into. [22]

On 16 July 2015, Paton Hooke sent an email to O’Brien Connors & Kennett saying that there had been further recent discussions between the parties “in relation the agreement (sic)”. Paton Hooke said that Darzi would like to resolve the lease agreement as soon as possible since, without a formal lease in place, Darzi had been placed in a difficult position in moving forward in relation to a number of aspects regarding the business being operated from the Premises.

On 20 July 2015, O’Brien Connors & Kennett replied to Paton Hooke’s letter of 11 June 2015, responding to the various items in that letter. The letter of 20 July 2015 ended by saying “we await your response”.

On 23 July 2015, Paton Hooke requested that O’Brien Connors & Kennett provide them, as a matter of urgency, with disclosure statements, a plan of the Premises and a copy of “the Liquor License”. That request was repeated in an email of 29 July 2015. In response to the email, O’Brien Connors & Kennett sent an email on the same day saying that they would arrange to let Paton Hooke have a disclosure statement by noon on the following day.

On 30 July 2015, O’Brien Connors & Kennett sent to Paton Hooke by email a “draft Disclosure Statement”. The draft disclosure statement was in a prescribed form commencing as follows:

On 15 September 2015, Pigott Stinson, who were then acting for Darzi, wrote to O’Brien Connors & Kennett, referring to the Heads of Agreement and the draft lease. Pigott Stinson observed that almost a year had passed since Darzi went into possession of the Premises and the parties had not yet entered into a formal lease. Pigott Stinson said that Darzi required a formal lease to be entered into without any further delay, as the delay was disrupting and having a significant adverse effect on Darzi’s business. The letter then set out a number of issues that were said to remain outstanding.

The letter of 15 September 2015 then said that Nolde’s delay in complying with the Heads of Agreement, and in particular its failure to finalise the lease, keep equipment in working order and transfer the on-premises liquor licence amounted to unconscionable conduct as defined in the Leases Act. The letter again asserted that the delay was disrupting and having a significant adverse effect on Darzi’s business, and referred Nolde to s 34 of the Leases Act, which details the circumstances in which a lessee is to be compensated for disturbance.

The reference to unconscionable conduct was a reference to Part 7A of the Leases Act, which deals with unconscionable conduct. Section 62B(1) provides that a lessor must not, in connection with a retail shop lease, engage in conduct that is, in all the circumstances, unconscionable. Section 62B(3) provides that the Tribunal may have regard, for the purpose of determining whether a lessor has contravened s 62B(1) in connection with a retail shop lease, to various matters set out in the provision. Under s 71A, a lessee under a retail shop lease may lodge an unconscionable conduct claim for determination of the claim by the Civil and Administrative Tribunal of New South Wales (the Tribunal). Under s 72AA, in proceedings for an unconscionable conduct claim lodged under that Part, the Tribunal is empowered to make an order that a party pay money to a person specified in the order, whether by way of debt, damages or restitution, or refund any money paid by a specified person. The Tribunal may also make such ancillary orders as it considers necessary for the purpose of enabling an order under the section to have full effect.

The letter of 15 September 2015 then said that Darzi was open to the parties and their solicitors attending an informal settlement conference as soon as possible to discuss and resolve the outstanding issues. The letter ended by saying that, if the lease and related matters could not be finalised, Pigott Stinson were instructed to apply to have the matter referred for mediation under the Leases Act, and that Darzi “reserves its rights with respect to the Heads of Agreement and the lease”. Nolde attaches some significance to the reservation of rights in that and subsequent letters. I shall refer to that matter below.

Pigott Stinson followed the letter of 15 September 2015 with a further letter on 28 September 2015, asking for a response no later than 2 October 2015. That letter reiterated that Darzi would consider taking such further action as it considers necessary including applying to have the matter referred to mediation under the Leases Act. Pigott Stinson ended by saying that Darzi “continues to reserve its rights”.

On 2 October 2015, O’Brien Connors & Kennett wrote to Pigott Stinson in response to the letter of 15 September 2015. Relevantly, O’Brien Connors & Kennett asserted that there had been an agreement between Messrs Koorey and Darzi that they would negotiate the future rent and rent reviews. The letter said that Nolde’s expectation was that, based on the figure for turnover, the rent would increase in proportion to the increase in turnover. O’Brien Connors & Kennett said that they were instructed that Mr Darzi had since sought to resile from any agreement to pay rent calculated as a percentage of turnover. The letter then responded to each of the specific matters raised in Pigott Stinson’s letter of 15 September 2015.

Pigott Stinson replied on 14 October 2015, saying that they believed that the matter had reached a state where any productive discussions regarding the lease could not take place without the parties’ solicitors being present. They urged O’Brien Connors & Kennett to request Mr Koorey meet for “an informal settlement conference” between the parties and their solicitors as soon as possible. The letter said that, if a response was not received by 21 October 2015, agreeing to an informal settlement conference, there would be no alternative but to apply for a formal mediation under the Leases Act. O’Brien Connors & Kennett responded on 19 October 2015 saying that Mr Koorey was agreeable to a conference on the terms suggested.

It appears that the proposed settlement conference took place on 2 November 2015. There was no evidence as to the discussion that occurred at the meeting. However, it appears from subsequent correspondence that, although the parties failed to reach a consensus, the outstanding issues were narrowed.

On 17 November 2015, Pigott Stinson sent an email to O’Brien Connors & Kennett, referring to the meeting on 2 November 2015. Significantly, the email was headed “Without Prejudice” and relevantly said:

Thereafter, most of the exchanges between Pigott Stinson and O’Brien Connors & Kennett were headed “without prejudice” or “without prejudice save as to costs”. I shall refer to the one particular exception below. Nolde attaches a considerable significance to those endorsements as indicating that the parties were confirming that the correspondence itself was not intended to give rise to any legally binding obligation. [23] I shall take that matter up below.

On 9 December 2015, Pigott Stinson sent an email to O’Brien Connors & Kennett, enquiring whether Nolde would agree to “a 12 year term of the lease”. The email said that an urgent response was awaited. O’Brien Connors & Kennett responded on 10 December 2015, saying that Nolde would not agree to a 12 year lease and confirmed the offer of a 10 year lease.

On 18 December 2015, Pigott Stinson wrote to O’Brien Connors & Kennett indicating Darzi’s stance in relation to the proposed term. On 5 February 2016, Pigott Stinson wrote to O’Brien Connors & Kennett complaining that they had not received a reply. Pigott Stinson also said as follows:

It is clear that, at that stage, the parties had not reached consensus as to several terms of any proposed lease, putting aside the question of the effect of the Heads of Agreement. In particular, the critical question of the term of the proposed lease had not yet been settled.

On 10 March 2016, O’Brien Connors & Kennett wrote to Pigott Stinson in response to the letter of 5 February 2016. The letter said that Nolde would agree to a term of five years with no option. The letter then said:

On 22 March 2016, Pigott Stinson wrote again to O’Brien Connors & Kennett. After referring to the letter of 10 March 2016, Pigott Stinson asserted that Darzi was entitled to “a minimum term of 12 years”. The letter asserted that Darzi had incurred significant time and expense based upon Nolde’s representation that Darzi would receive the benefit of a long term lease. The letter said:

On 22 April 2016, O’Brien Connors & Kennett sent an email to Pigott Stinson relevantly saying:

Pigott Stinson responded by letter of 29 April 2016 saying that it was Darzi’s “strong view” that it was entitled to a minimum term of 12 years. The letter said, however, that, “as a last resort”, Darzi was prepared to accept a lesser term of 10 years (being a five year term with a five-year option) provided the commencing date was to be the date when the lease was signed by Nolde. The letter said that, if Nolde’s acceptance was not received before 4pm on 11 May 2016, Pigott Stinson was instructed to lodge an application for a mediation at the Retail Tenancy Unit without further notice.

O’Brien Connors & Kennett responded by email of 11 May 2016, rejecting Darzi’s offer as to the commencement date of the lease. The email asserted that Darzi had entered into occupation of the Premises on 14 October 2014, assumed control of the business and took the profits of the business immediately. The email also asserted that Darzi had resiled from the offer to pay $2,000 per week or 12% of turnover. The email was not endorsed “without prejudice”.

On 11 May 2016, O’Brien Connors & Kennett sent a letter to Pigott Stinson, in addition to their email of the same date. The letter was marked “Without Prejudice save as to costs” and referred to their “letter of even date”. The letter said that O’Brien Connors & Kennett were instructed to reaffirm Nolde’s previous offer of “a 5×5 year lease term” commencing 14 October 2014, noting that Darzi had taken occupation of the Premises at that time. The letter ended as follows:

By letter sent via email on 16 May 2016, Pigott Stinson responded to “your letter dated 11 May 2016”. The letter of 16 May 2016 was marked “Without prejudice save as to costs”, and said that Pigott Stinson were instructed “to make one final offer” and that, if the parties were not able to reach agreement by 23 May 2016, Darzi would have no alternative but to lodge an application for mediation at the Retail Tenancy Unit, seeking a 20 year lease term. The letter said:

The critical exchange then occurred. O’Brien Connors & Kennett wrote to Pigott Stinson on 27 May 2016, referring to the letter emailed on 16 May 2016. The letter of 27 May 2016, which was marked “Without prejudice as to Costs”, relevantly said:

Darzi contends that the exchange of 27 and 31 May 2016 gave rise to a binding and enforceable contract for the grant of a lease of the Premises, in terms to be gleaned from the preceding correspondence. Nolde, on the other hand, points to aspects of the exchange that, it says, signify the contrary. Thus, the letter of 27 May 2016 is not expressed as an offer but simply states that Nolde “is agreeable to a lease” with a specified term. The response of 31 May 2016 refers to the wish of Darzi “to have the lease signed by both parties” before Mr Darzi travelled overseas on 16 June 2016. In addition, the letter of 31 May 2016 reserves all of Darzi’s rights. Thus, the letter is not, in terms, an acceptance of an offer. However, the exchange must be understood in the context of the substantial correspondence that preceded the letter of 27 May 2016 and, in particular, the exchanges on 11 May 2016 and 16 May 2016. I shall return to that matter below.

It is common ground that, following the exchange of 27 and 31 May 2016, there was consensus between Darzi and Nolde as to all matters necessary for the creation of a legally binding and enforceable contract for the grant of a lease of the Premises. The question is whether the exchange itself, objectively considered in the context of the earlier correspondence, evinced an intention on the part of each of Darzi and Nolde to be legally bound by an enforceable contract for the grant of a lease of the Premises by Nolde to Darzi for that term, and for the rent and otherwise on the terms and conditions that had been settled in the earlier correspondence.

On 3 June 2016, Pigott Stinson sent to O’Brien Connors & Kennett, by email headed “Without prejudice”, a “final lease for execution”, with a request that the lease be returned, signed by Nolde together with an updated disclosure statement. It appears that, in preparing the form of lease sent with the email of 3 June 2016, Pigott Stinson had overlooked earlier correspondence whereby the parties agreed to attach a plan of the Premises as an exhibit to the proposed lease. [24] Following a telephone conversation between the solicitors on 7 June 2016, Pigott Stinson sent another email to O’Brien Connors & Kennett headed “Without prejudice”, referring to the earlier correspondence and attaching a plan of the Premises as an exhibit to the lease.

The email of 7 June 2016 attached “an updated final lease” with changes identified in the email and then said:

On 15 June 2016, Pigott Stinson wrote to O’Brien Connors & Kennett referring to the email of 7 June 2016 and saying:

The primary judge found that, by 31 May 2016, the parties had reached a consensus on the key terms that were legally necessary to constitute a lease of the Premises and that those terms were subsequently embodied in the 15 June Document. [25] Her Honour accepted that the terms of the 15 June Document reflected the terms that had been agreed in correspondence and were sufficiently clear and certain to be capable of forming a binding contract. However, her Honour said that consensus on and certainty of the terms was not sufficient to create a binding agreement and that the parties must also be demonstrated to have intended to be bound and to form legal relations. [26] Her Honour concluded that, when one considered, objectively, the correspondence between the solicitors for Darzi and the solicitors for Nolde, the surrounding circumstances and the subsequent conduct of the parties, the parties did not intend to be legally and contractually bound until the parties had executed and exchanged a formal lease instrument. [27]

The primary judge considered that the surrounding circumstances began with the signing of the Heads of Agreement and Darzi’s entry into occupation of the Premises on 20 October 2014 and commencing to pay rent. Her Honour found that the Heads of Agreement contained key terms relating to rent, term, commencement date and other matters, such as the liquor licence for the Premises and insurance, and that Darzi had commenced occupation and paying rent “on that basis”. [28] However, her Honour considered that the evidence made clear that the parties, through their respective solicitors, continued to negotiate on the basis that the terms agreed between them would be included in a formal lease that was intended to be executed and exchanged by the parties and then registered. Her Honour considered that, while it appeared that Darzi expected that the formal lease would reflect the terms of the Heads of Agreement, that expectation did not eventuate, leading to disputation between the parties as to the terms of the formal lease.

The primary judge observed that there was some dispute between the parties about whether the Heads of Agreement constituted a binding contract. Her Honour said that the parties did not make detailed submissions on that question and that the hearing proceeded on the basis that the Court did not need to determine the question. Accordingly, her Honour made no determination as to whether the Heads of Agreement constituted a binding contract. [29]

The primary judge found that the start of the formal lease preparation process commenced on 27 May 2015, when Nolde’s solicitors sent to Darzi’s solicitors a draft lease, which was stated to be “for approval” by Darzi. Her Honour considered that Nolde intended to be bound by the terms of the draft if it had been approved, executed and returned by Darzi in that form. However, as indicated above, the terms of the draft were not approved or accepted by Darzi because they were inconsistent with the Heads of Agreement as to term, rent and other matters.

The primary judge referred to the email sent by Darzi’s solicitors on 17 November 2015 that included the following phrase:

The primary judge observed that none of the subsequent correspondence made mention of the parties being bound once a consensus on the terms of the proposed lease had been reached. Her Honour also referred to the fact that much of the correspondence was marked “without prejudice”. Her Honour considered that, when read in the light of the email of 17 November 2015, the subsequent correspondence did not indicate that the parties intended to be bound as soon as the terms of the proposed lease were agreed upon. Rather, her Honour held, the correspondence showed that the negotiations centred upon trying to agree the terms to be included in a formal lease instrument that was to be executed and exchanged “in accordance with usual practice”. [30] Her Honour considered that the correspondence did not indicate an intention to depart from “the usual practice” of an exchange of counterparts of a formal document.

The email dated 7 June 2016 from Darzi’s solicitors to Nolde’s solicitors, which sent the “final lease” that had been prepared by Darzi’s solicitors, requested that Nolde execute the document so that the parties could then exchange counterparts. The primary judge considered that that was consistent with those steps being part of the contractual process before the parties were intending to be legally bound.

The primary judge considered that it was significant that the parties had been in dispute for some time about the terms that would apply to a formal lease document and that that dispute led to the informal “without prejudice” settlement conference. The negotiations thereafter were conducted through the solicitors, primarily by the correspondence that was marked “without prejudice”. Her Honour acknowledged that the acceptance of a “without prejudice” offer can give rise to a binding and enforceable agreement. [31] Nevertheless, her Honour considered that the “without prejudice” nature of the correspondence between the solicitors was significant, as indicating that the parties were not wishing to be bound until a formal lease instrument was finally agreed, executed and exchanged.

The primary judge considered that the significance of the “without prejudice” endorsements on correspondence was increased by the fact that, on 11 May 2016, Nolde’s solicitors sent two communications to Darzi’s solicitors. One was marked “without prejudice” and offered a five year term with a five-year option. The second was not marked “without prejudice” and rejected Darzi’s offer of 29 April 2016. From this, the primary judge thought it could be inferred that Nolde’s solicitors gave some thought to when the expression “without prejudice” was being used, and thus the usage should be given some effect, rather than simply reading the words as a term the solicitors included as a matter of course. [32]

The primary judge considered that the express reservation of their client’s rights, in Darzi’s solicitors’ letters of 16 May 2016 and 31 May 2016, related to a right to seek to enforce the Heads of Agreement, which Darzi asserted were binding, in the event that a formal lease instrument was not finalised. Her Honour considered that a reasonable bystander would regard the reservation of rights in a “without prejudice” letter to be consistent with an intention not to be bound until the further acts contemplated were completed, being the execution of a lease in terms approved by the parties.

The primary judge attached importance to the fact that the letter from Nolde’s solicitors of 27 May 2016 began with the statement that their client was “agreeable to a lease”, said “please let us have your advices” and was marked “Without Prejudice as to Costs”. Her Honour considered that the words “we await your advices” were not suggestive of an intention to be immediately bound, either at that time or on receipt of the engrossed documents. Rather, her Honour considered, the words “we await your advices” were more akin to a request meaning “please arrange for the formal lease to be submitted so it can be reviewed and, if approved, executed and exchanged”. [33] Her Honour considered that those words were consistent with the interpretation that there were other steps yet to be undertaken by Nolde, before Nolde and Darzi were bound by the terms being offered.

The primary judge considered that an objective review of the correspondence indicated that Nolde was not pressing for a formal lease, had concerns about Darzi’s tenure and did not take steps to complete the acts left for it to undertake before being bound by the 15 June Document. Thus, her Honour referred to the significant delays on Nolde’s part in responding to Darzi’s requests for a formal lease in 2015. Further, Nolde did not respond to the correspondence sending a formal lease document on 3 June 2016 and 7 June 2016. Nolde did not update the disclosure document required under the Leases Act, notwithstanding its advice in a letter dated 10 March 2016 that it would do so once all terms were agreed.

The primary judge considered that those matters were indicative of a party intending not to be bound until a formal lease document was executed and exchanged. Her Honour considered that something more than Nolde’s silence after its solicitors’ letter of 27 May 2016, which was marked “Without Prejudice as to Costs”, would be necessary to indicate an intention to be bound immediately, without formal execution and exchange.

The primary judge then considered subsequent conduct of, and communications between, the parties. [34] Her Honour accepted that action taken by Mr Koorey, in applying to the Liquor and Gaming Authority to remove Nolde as the licensee and to replace it with Darzi’s nominee, and Darzi taking out public liability insurance, was consistent with a lease of a fixed term, rather than a monthly tenancy terminable at will of the kind alleged by Nolde. [35] Her Honour considered, however, that the steps were also consistent with a five year minimum term under the Leases Act or a lease in accordance with the terms outlined in the Heads of Agreement. Her Honour did not consider that it was conduct that was unequivocally referrable to a binding agreement in the terms of the 15 June Document.

It was common ground that, since 26 September 2016, Darzi has paid rent in accordance with the terms of the 15 June Document, including increases that took effect in December 2016, December 2017 and December 2018. On the other hand, Darzi did not start paying rent referrable to the 15 June Document until more than three months after it had sent the executed counterpart to Nolde and only began paying that rent after Nolde’s solicitor sent an email of 8 September 2016 attaching a schedule setting out arrears of rental and outgoings. Nevertheless, Nolde continued to accept rent at that rate for nearly two and a half years. However, the primary judge observed, Nolde did so in circumstances where it had asserted that a higher rent was payable and has not issued any invoices or demands for rent since 8 September 2016. Her Honour considered that, in that context, Nolde’s conduct could be characterised as acquiescing in the rent being paid in a lesser amount than it considered it was payable rather than acting in a way that was unequivocally referrable to the 15 June Document. Her Honour considered that, at its highest, that conduct was not inconsistent with the lease of the kind being sought by Darzi. However, her Honour said, it was also consistent with a lease with a five year minimum term under the Leases Act, a lease in accordance with the Heads of Agreement or a monthly tenancy as contended for by Nolde. Her Honour therefore concluded that the conduct of the parties in respect of outgoings was equivocal.

While the primary judge accepted that the payment and acceptance of rent in accordance with the 15 June Document was a significant factor for Darzi, her Honour considered that the context in which those payments were made, coupled with the surrounding circumstances and conduct by both parties prior to and after 15 June 2016, evinced an intention not to be bound before the execution and exchange of a formal lease instrument. Her Honour did not consider that the conduct of the parties constituted omissions or acts of part performance sufficient to support a finding of a binding agreement for lease or a lease in the terms of the 15 June Document.

Section 8(1) of the Leases Act relevantly provides that, for the purposes of the Act, a retail shop lease is considered to have been entered into when a person enters into possession of a retail shop as lessee under the lease or begins to pay rent as lessee under the lease, whichever happens first. Under s 3, the terms retail shop lease or lease mean any agreement under which a person grants or agrees to grant to another person for value a right of occupation of premises for the purpose of the use of the premises as a retail shop. The term retail shop is defined as including premises that are used, or proposed to be used, wholly or predominantly for the carrying on of one or more of the businesses prescribed. By the operation of s 84A and Sch 3 s 17(1), the businesses specified in Sch 1 are taken to be prescribed for the purposes of the definition of “retail shop” in s 3. Schedule 1 includes “[r]estaurants, cafeterias, coffee lounges, food courts and other eating places”. Thus, it is clear that the Premises constitute a retail shop for the purposes of the Leases Act. Under s 3, a retail shop lease may exist whether or not there is an agreement for lease in writing. As the primary judge observed, all that is required is an agreement under which a person is granted the right of occupation of a retail shop in exchange for value, typically rent.

Section 16 of the Leases Act at the relevant time [36] provided that the term for which a retail shop lease is entered into, together with any further term or terms provided for by any agreement or option for the acquisition by the lessee of a further term as an extension or renewal of the lease, must not be less than five years. If the lease is entered into in contravention of s 16, the validity of the lease is not affected but the term of the lease is extended by such period as may be necessary to prevent the lease contravening s 16.

The primary judge found that the parties executed the Heads of Agreement, following which Darzi entered into occupation of the Premises and commenced paying rent. Relevantly, the Heads of Agreement provided for the amount of rent to be paid, the commencement date, a lease term of five years plus three, five-year options to renew, and other terms. Her Honour observed that, as events transpired, there were negotiations that led to the 15 June Document, which included different terms in respect of rent, term and commencement date, which were not binding on the parties. However, her Honour considered that it did not necessarily follow that the tenancy in existence was a tenancy at will and terminable at one month’s notice.

Her Honour considered that the consensus reached on key terms, as set out in the Heads of Agreement at the time Darzi entered into occupation and commenced paying rent, meant that s 127 of the Conveyancing Act 1919 (NSW) did not apply. Section 127 relevantly provides that no tenancy from year to year is to be implied by payment of rent and that, if there is a tenancy, and no agreement as to its duration, such tenancy should be deemed to be a tendency determinable at the will of either the parties by one month’s notice in writing expiring at any time.

The primary judge held that the relevant time for assessing when a retail shop lease arose were the dates on which Darzi entered into possession or started paying rent. Her Honour found the Darzi commenced occupation of the Premises on 20 October 2014 and paid rent for the first time on 3 December 2014. Her Honour held that, on each of those dates, there was consensus between the parties on key terms, as recorded in the Heads of Agreement. Thus, her Honour concluded, there was an agreement under which Nolde granted to Darzi for the rent consisting of $2,000 per week or 12% of turnover, whichever was greater, a right of occupation of the Premises, which, her Honour held, was a retail shop lease for the purpose of the Leases Act. Accordingly, her Honour found that a retail shop lease was entered into on 20 October 2014, being the date on which Darzi commenced occupation of the Premises.

At the commencement of the oral hearing of the appeal, Darzi sought leave to rely on an amended notice of appeal. Several of the amendments were not opposed and there is no need to say anything further about them. However, Nolde opposed amendments that raised the question of whether the Heads of Agreement was binding.

In the proposed amended notice of appeal, ground 1 was to be amended to read as follows:

The Court indicated to the parties that it would hear argument on the question of amendment and would deal with that question in dealing with the merits of the appeal. Both parties acceded to that proposal.

In opposing the amendments outlined above, Nolde relied on an affidavit sworn by Mr Peter Kennett on 4 July 2019. Mr Kennett is the solicitor for Nolde, who receives instructions from Mr Koorey. Mr Kennett said that, during the course of the proceedings in the Equity Division, Nolde had sought to make a claim that the Heads of Agreement was binding and on 9 July 2018, Mr Kennett wrote to Pigott Stinson enclosing a proposed cross summons that sought relief to that effect. Mr Kennett requested Darzi’s consent to the filing of the cross summons. On 30 July 2018, Pigott Stinson replied saying that Darzi did not consent to the filing of the cross summons.

Following receipt of Pigott Stinson’s letter of 30 July 2018, Mr Kennett had discussions with Mr Koorey and junior counsel about a claim by Darzi made in the letter of 30 July 2018 that the Heads of Agreement was void by reason of the provisions of the Leases Act [37] and Darzi’s refusal to consent to the filing of the proposed cross summons. Mr Kennett was instructed that Nolde no longer wished to seek orders that the Heads of Agreement was binding and wished to seek orders to the effect that there was no concluded or binding agreement for lease and that there existed a periodic tenancy. As a result of those instructions, Mr Kennett took no further steps to consider the issue of whether the Heads of Agreement was binding because he did not believe that either party was contending that it was binding. He said in his affidavit that, had he known that Darzi would contend that the Heads of Agreement was binding, he would have sought detailed instructions as to the circumstances surrounding its execution in order to consider the question of whether or not it is or was capable of forming a binding agreement and whether the parties intended to be bound by it at the time it was executed.

In her reasons, the primary judge observed that there had been a dispute between the parties about whether the Heads of Agreement was binding but that the parties did not make detailed submissions on that issue. Her Honour said that the hearing proceeded on the basis that she did not need to determine the point and that, accordingly, her reasons did not make any determination on that issue. [38]

Counsel for Darzi referred to that acknowledgment by the primary judge and complains that it was erroneous not to decide the question in circumstances where the Heads of Agreement was the genesis of the relationship between the parties and that, in determining the question of whether the parties intended to enter into legal relations, it was inescapable that her Honour would have to resolve the competing contentions in relation to the Heads of Agreement. It was contended that, if the Heads of Agreement entered into at the commencement of the relationship were legally binding and there was subsequently a complete consensus on the terms of the 15 June Document, a finding that the parties did not then intend to enter into legal relations would have been difficult.

Counsel for Darzi accepted that no declaration had been sought before the primary judge, and confirmed that no declaration is sought in this Court, that the Heads of Agreement was binding and, more importantly, that no order was or is sought that the Heads of Agreement be specifically performed. However, he contended, that did not mean that the primary judge did not need to determine the legal status of the Heads of Agreement in circumstances where the submission had squarely been put to her Honour that the Heads of Agreement was binding and that it constituted the commencement of the legal relationship between the parties.

Counsel for Nolde had no objection to Darzi relying on the fact that the primary judge found that the Heads of Agreement constituted a sufficient agreement to found a retail lease for the purposes of the Leases Act. That is to say, Nolde accepted that her Honour found that there was consensus between the parties sufficient to form a retail lease without having to determine whether the Heads of Agreement, as a standalone document, was legally enforceable outside the operation of the Leases Act. Nolde accepted that the Heads of Agreement evidenced the agreement as to the commencement of the operation of, and the payment of rent under, a retail lease.

The contention advanced on behalf of Darzi is that the parties entered into a legally binding relationship as a consequence of the Heads of Agreement, whether or not the Heads of Agreement was an enforceable agreement as to all of its provisions. In circumstances where Darzi does not seek to enforce the Heads of Agreement as an enforceable standalone contract, it should be permitted to base its contention that a binding agreement between the parties came into existence following the critical exchange of 27 and 31 May 2016 because, amongst other matters, there was a legally binding relationship between the parties as a result of the Heads of Agreement. In circumstances where Darzi eschews any suggestion that the Heads of Agreement should be enforced, I do not consider that the proposed amendment goes beyond that proposition. Accordingly, Darzi should have leave to rely on grounds (1A) and (1B) of the proposed amended notice of appeal.

The other grounds in Darzi’s amended notice of appeal that were pressed may be restated as follows:

Darzi contends that the parties are bound in terms of the 15 June Document. Nolde prepared a proposed notice of contention, which addressed the extent to which the primary judge based her decision on the basis that Darzi had not partly performed any relevant agreement for lease. [39] Both parties accept that her Honour erred in so far as she relied on the doctrine of part performance, in relation to post contractual conduct. However, Nolde asserts that the error was of no moment because equivocal post contractual conduct is unlikely to be corroborative and her Honour considered the matter by reference to the objective bystander test, which is accepted by both parties as correct. Nolde contends that her Honour ought to have dismissed Darzi’s claim on the basis that a reasonable person would not have concluded that the parties intended to enter into a binding contract until Nolde executed the formal lease document and executed counterparts were exchanged.

The key issue in the proceedings was whether the parties had reached a binding agreement in the terms of the 15 June Document. Darzi contends that, while the primary judge correctly recognised that question, her Honour arrived at the wrong conclusion in finding that, although Darzi occupied the Premises under a statutory lease under the Leases Act on the terms of the Heads of Agreement, except for the critical three successive five-year options, there was no other binding agreement. Darzi complains that the legal characterisation of Darzi’s occupation by her Honour was one for which neither party contended and that her Honour dismissed its claim and Nolde’s cross claim without granting the relief sought by either party.

The ultimate issue in the appeal is whether the exchange of correspondence on 27 May 2016 and 31 May 2016 gave rise to a legally binding and enforceable contract for the grant of a lease in respect of the Premises by Nolde to Darzi in the terms of the 15 June Document. Several sub-issues arose in relation to that ultimate issue. The first sub-issue concerns the significance, if any, that should be attached to the Heads of Agreement as constituting a binding agreement. The second is the actual language of the critical exchange, in the context of the earlier correspondence, and whether the language signifies that reasonable persons in the position of Darzi and Nolde respectively would understand the communications between their respective solicitors as giving rise to a binding and enforceable contract. The third concerns the significance attached to the marking of correspondence “without prejudice” or “without prejudice save as to costs”. Finally, there is a question as to the extent to which the conduct of the parties after the critical exchange is relevant for the purpose of determining whether they intended to be legally bound by the exchange.

Darzi did not contend that it was entitled to enforce the Heads of Agreement as a binding contract. However, it attaches significance to the Heads of Agreement as constituting the genesis of the relationship between it and Nolde. Darzi says that, in determining whether the parties intended to enter into legal relations, it was necessary for the primary judge to resolve the competing submissions as to whether the Heads of Agreement were contractually binding. In that regard, Darzi asserts that the findings of her Honour are “redolent with enforceability”. Thus, her Honour found that the Heads of Agreement contained key terms relating to rent, term, commencement date and other matters, such as the liquor license and insurance and that Darzi commenced occupation and commenced to pay rent “on that basis”. Further, her Honour found that the parties were bound by a retail shop lease because, as between them, there was “consensus as to terms of such a lease but not any formal written lease entered into”.

Darzi contends that the primary judge’s finding in relation to the existence of a lease under the Leases Act was consistent only with the Heads of Agreement being binding. Her Honour found that a statutory lease existed because all that was required under the Leases Act was an agreement under which a person has been granted the right of occupation of a retail shop in exchange for value, typically being rent. Her Honour found that, after the parties reached agreement in terms of the Heads of Agreement, Darzi entered in possession of the Premises and paid rent in accordance with the Heads of Agreement. Darzi contends that her Honour’s finding that there was an agreement for the purposes of the statutory test also constituted a finding that there was a binding agreement on the terms of the Heads of Agreement.

The Leases Act contemplates that a tenant enters into occupation pursuant to an “agreement” for value. Clearly, the primary judge accepted that Darzi entered into occupation on the basis of the Heads of Agreement and found that there was a retail shop lease under the Leases Act. There is no challenge to that conclusion. To the extent that it was necessary for her Honour to determine whether there was an existing legal relationship between the parties, her Honour did so. It follows that there was a legally binding arrangement between Nolde and Darzi in terms of the Heads of Agreement, which matured into the statutory lease under the Leases Act when Darzi entered into possession of the Premises on the basis of the Heads of Agreement.

The question is whether the parties intended to make a concluded bargain. [40] Where parties have reached consensus on all relevant terms of a proposed lease between them, but have also agreed that a formal lease instrument is to be executed by each of them, there may still be a question as to whether the parties intended to be bound at that point. Whether there is a concluded and binding agreement depends upon the intention of the parties to be determined, objectively, without regard to the subjective intention of either one of the parties. [41] Thus, the Court must ascertain the common intention of the parties, determined objectively from their conduct and the communications between them, having regard to the surrounding circumstances known to each of them. [42] That question is different from the question of whether the parties had reached agreement upon such terms as are, in the circumstances, legally necessary to constitute a contract, although the two questions may often be closely related. Thus, even though the parties may have reached consensus as to all of the terms of their bargain, they may nevertheless not have intended, at that point, to enter into legally binding relations. [43]

That question is not new and was recognised in the Corpus Iuris Civilis. Thus, while no writing or other particular form was required for a valid and enforceable contract for sale, if the parties agree in the course of their negotiations that there is no binding agreement until documents of sale have been drawn up and subscribed, there will be no enforceable or binding contract until that occurs. [44]

In commercial lease transactions, where the parties are acting through solicitors, it may generally be the case that they do not intend a binding agreement until formal execution of the relevant lease instrument or a formal exchange of counterparts, thereby marking the stage at which a contract comes into existence. [45] Nevertheless, if there is evidence that the parties had a common intention that, despite the normal expectation as to how such a transaction would proceed, the bargain reached informally between them should become immediately binding, even though its terms may later be amplified and embodied in formal documents to be signed and exchanged by their respective solicitors. [46]

Where the parties engage in negotiation with a view to reaching consensus and a binding agreement as to the terms upon which one of the parties might enter into occupation as tenant from the other party as landlord, there will be no legally binding relationship between the parties until such time as consensus is reached and the common intention to be legally bound is formed. Where negotiations are engaged in with a view to stating complex relationships between the parties and the parties evince an intention that any agreement reached between them will be embodied in a deed executed by the parties, there will generally be no binding agreement until a consensus is embodied in a formal agreement. [47]

Clearly, a concluded agreement for lease can come into existence prior to the execution of a formal lease instrument. Whether such an agreement does come into existence in a particular case calls for an objective determination of the intention of the parties gleaned from their conduct and the communications between them. It is appropriate and necessary to have regard to the commercial circumstances surrounding the communications and the subject matter of the communications. If the terms of the correspondence between solicitors, objectively considered, evince an intention that neither client was to be bound at the moment when consensus was reached as to the terms of a proposed lease, but indicated an intention that there be a further formality undertaken, such as an exchange of counterparts or registration of signed instruments, the mere fact of consensus will be insufficient to constitute a binding agreement. [48] The question is whether the words and conduct of each party or its agents, such as solicitors, would have led a reasonable person in the position of the other to believe that they have a binding contract. [49]

In the present case it is significant that the parties were already in a legally binding relationship when the critical exchange of 27 May 2016 and 31 May 2016 occurred. That is to say, they each signed a version of the Heads of Agreement, which was regarded as sufficiently evidencing their arrangement to allow Darzi, as the proposed tenant, to enter into occupation of the Premises and set up the Premises for carrying on the business of a licensed restaurant. Accordingly, there was an agreement between the parties for Darzi to enter into occupation for value adequate to satisfy the provisions of the Leases Act necessary for the creation of a retail lease. That is to say, there was a binding relationship between the parties, at latest, from 20 October 2014. While the parties then embarked upon a course of negotiation as to the terms upon which Darzi would continue in occupation, the basis of their legal relationship was the Heads of Agreement and the Leases Act. It became apparent that each party desired to depart in some respects from the terms of the Heads of Agreement. The question is whether, against that background, as detailed above, their conduct and communications between them up to 31 May 2016, objectively considered, evinced an intention that they wished to be legally bound by terms and conditions different from the Heads of Agreement and different from the terms of the statutory lease under the Leases Act.

Analysis of the communications set out above demonstrates that the parties engaged in a series of offers and counter offers that, ultimately, led to consensus, when Darzi accepted, by the letter of 31 May 2016, the offer made by Nolde, in the letter of 27 May 2016. The language of that long course of correspondence was not simply that of offering to treat but firm proposals, each way, for resolution of the differences between them. Certainly, the parties contemplated that any agreement would be finally completed by the execution, by both of them, of a formal lease and its registration under the Real Property Act 1900 (NSW) (Real Property Act). However, the final completion of an executory contract is a different question from whether an executory contract came into existence by reason of the correspondence in the first place.

In circumstances where the parties were already in a legally binding relationship, there is no reason to assume that they did not intend to be bound by an executory contract, formed by correspondence, that would be completed by the execution and registration of a formal lease instrument. While the two letters that constituted the critical exchange did not speak in terms of “offer” or “acceptance”, the earlier correspondence clearly did. The parties were clearly striving for consensus, albeit in the absence of total goodwill. That striving continued under the cloud of the threat by Pigott Stinson on behalf of Darzi to make a claim of unconscionable conduct under the Leases Act. Whether there was a concluded agreement for lease depends on the intention of Nolde and Darzi, determined objectively without regard to the subjective intention of either of them, but having regard to the commercial circumstances, which included that they were already in a binding relationship. Both parties were represented by solicitors who would, in due course, attend to the process of execution of a formal lease instrument and its subsequent registration, by way of completion of their executory agreement.

The primary judge erred in referring to an execution and exchange in accordance with “the usual practice”. It may be that the Court should take judicial notice of the almost invariable conveyancing practice in New South Wales, in relation to the sale and purchase of land, that there is no intention to enter into legally binding relations until there is an exchange of signed counterparts of a contract for sale, by whatever mechanism that exchange may be effected. That process, of course, does not fit happily with the conventional concept of “offer” and “acceptance”. Nevertheless, the point at which buyer and seller are taken to have intended to enter into legal relations is the point at which the buyer has a counterpart of the contract for sale executed on behalf of the seller and the seller has a counterpart of the contract for sale executed by the buyer.

However, it is not entirely clear whether there is a similar practice in New South Wales in relation to agreements for the grant of commercial or retail or residential leasehold interests. In certain circumstances, the Leases Act pre-empts the necessity for an agreement and the entry by a tenant into possession of proposed demised premises gives rise to the juridical act of creating a tenancy. The character and terms of the tenancy, of course, will depend upon any agreement between the parties that may have been made before the tenant entered into occupation. The grant of possession is, in a sense, analogous to the delivery of a duly executed conveyance or transfer together with the payment of the price, by way of completion of an executory contract for the sale of land.

While there will be many instances where there is a formal agreement for the grant of a lease prior to the actual grant and entry into of possession, it is by no means invariable that there will be a prior binding and enforceable contract for the grant of a lease prior to a leasehold interest being brought into existence. It is not uncommon for a landlord to allow a tenant into possession upon the execution of a lease by the tenant and the payment of the landlord’s costs, prior to the landlord executing the lease.

In the present case, Darzi was allowed into occupation prior to the execution of a formal lease instrument, on the basis of the Heads of Agreement, and had the benefit of the statutory lease under the Leases Act. In the circumstances that existed between the parties, the correspondence between them, objectively considered, evinced a clear intention that, once consensus was reached as to the terms of the lease that was to bind them, there would be a binding and enforceable agreement that they would enter into a formal lease instrument in those terms. The primary judge erred in concluding otherwise.

For the reasons that follow, the conclusion that the correspondence evinced an intention to be legally bound once consensus on the terms was reached is not undermined by use of the phrases “without prejudice” and “without prejudice as to costs”. The primary judge misconstrued the use of the phrases, in the context in which those endorsements appeared in the correspondence. The more probable reason for the use of the phrases was the existence of the dispute identified in the correspondence prior to the meeting on 2 November 2015, namely, whether Darzi had remedies available to it under the Leases Act in consequence of alleged unconscionable conduct on the part of Nolde. In addition, in the subsequent ensuring correspondence, Pigott Stinson said on a number of occasions that Darzi “reserved its rights”. That signified a reservation of Darzi’s rights to relief under the Leases Act in relation to alleged unconscionable conduct rather than a statement that the correspondence was not intended to give rise to legally binding obligations.

That threat to claim relief for alleged unconscionable conduct explains what would otherwise have been a curious use of the phrases “without prejudice” and “without prejudice except as to costs” and, in one case, “without prejudice as to costs”. That is to say, the phrases were not saying that acceptance of a proposal contained in the letter would not give rise to a binding contract. Rather, each party was, in effect, saying that the letter making an offer could not be tendered against it as an admission in proceedings brought under the Leases Act. The same comment can be made in relation the reservation of rights by Pigott Stinson. That is to say, by writing letters reserving rights, Pigott Stinson were saying that, in the absence of final agreement, the writing of the letter was not to affect Darzi’s rights under the Leases Act in relation to alleged unconscionable conduct.

A binding contract came into existence upon receipt by Nolde’s solicitors of the letter from Pigott Stinson of 31 May 2016. The conduct of the parties thereafter did not strengthen or derogate from that conclusion. Since considerable argument was addressed to that matter, it is desirable to say something further about it.

Darzi contends that the primary judge erred in failing to give sufficient weight to the objective evidence that demonstrated that Nolde had adopted the terms of the 15 June Document in so far as Nolde:

The conduct or actions of the parties after the time when an agreement is said to have been made, which reflects the understanding of the parties as to whether or not there was a binding contract, cannot determine whether, as a matter of law, there was a binding contract. The subjective understanding of either party will not normally be relevant to the question of whether an agreement was entered into, any more than it is relevant as to whether or not the party intended to enter into a binding agreement.

The time at which it is necessary for a court to determine whether parties have entered into a legally binding and enforceable contract is the time when the contract is said to have been made. The extent to which evidence as to subsequent actions or conduct of the parties may be taken into account in determining whether there was a binding and enforceable contract must be considered in that light. The conduct of the parties after a contract is said to have been made cannot change the fact of whether or not there was a contract. [50]

Where, for example, there is a dispute as to whether an oral contract was made, evidence of the subsequent actions or conduct of the parties may be taken into account in order to resolve disputes as to what was said at the time when the alleged contract was made and the context in which a reasonable person would have understood the words to have meant in the manner and circumstances in which they were spoken. Similarly, where there is a dispute concerning the binding nature of an arrangement that is informal in whole or in part, involving oral or inferred terms, the actions or conduct of the parties after the time of the alleged making of the contract may be taken into account in the same way. Only in rare circumstances will there be an occasion for regard to be had to subsequent actions and conduct where a purely written contract is asserted. Where one party alleges that a contract has been formed solely by written documents, the question of whether that written document is binding will normally be a matter of objective construction. On the other hand, the subsequent actions and conduct of the parties may indicate that there were other uncompleted matters that required negotiation between the parties before it could be said that the parties intended there to be a final and binding contract. [51]

Again, where there is a dispute as to the facts known to the parties at the time of the alleged contract, their actions after that time may throw light on what was known to them at the relevant time. The purpose of considering evidence of subsequent conduct or actions, however, is to determine what actually happened or was known prior to the time of the making of the contract. For example, where one party alleges an intention to be legally bound by written documents and the other party disputes the legally binding nature of the material, one factor for determining whether the parties objectively intended to be bound is whether the writing covers everything that the parties, acting reasonably, would intend to be regulated by their agreement. Thus, their actions subsequent to the writing may disclose that there were matters that had not been attended to that, objectively considered, the parties must be taken to have intended to be covered. Where the writing does not cover such matters, there would be good ground for concluding that, objectively considered, the writing was not intended to create a legally binding obligation. [52]

Nolde attaches some significance to the reference in the email of 7 June 2016 to the proposal “that we exchange the signed leases" and the reference in the letter of 15 June 2018 to a request to "deliver a counterpart of the complete Lease". Nolde contends that, although those communications occurred after the agreement alleged to be constituted by the exchange of 27 May 2016 and 31 May 2016, they signify an intention that the parties did not intend to be legally bound until Darzi had received a counterpart of the final version of the lease executed by Nolde.

Darzi, on the other hand, attaches significance to conduct on the part of Nolde that also occurred after the exchange of 27 May 2016 and 31 May 2016, being the demand by Nolde and payment by Darzi of rent and outgoings in terms of the 15 June Document. It asserts that that conduct can be taken into account in order to draw an inference that, at the time of the exchange of correspondence, the parties intended that there would be a binding agreement for lease.

Those matters may be evidence of a subjective understanding on the part of the parties. However, that understanding will not normally be relevant to the question of whether the correspondence, objectively considered, evinced an intention to enter into a binding contract. The facts as to the demand for and payment of rent and outgoings may say something about the subjective understanding or belief of the parties as to their respective rights and obligations. Unless the facts themselves give rise to a contract or a variation of a contract or, in some circumstances, an estoppel, they cannot bear on the question of whether a contract had been made months before, except to the very limited extent indicated above in determining the facts that occurred or were known to the parties at the time when the contract was made.

By notice of motion filed 1 May 2019, Darzi sought an order that the Court receive further evidence under s 75A(7) of the Supreme Court Act 1970 (NSW), in the form of affidavits of Sonia Sonia of 30 April 2019 and Mr Darzi affirmed 30 April 2019. The affidavits deal with circumstances that occurred after the primary judge reserved her decision and relate to demands for and payment of outgoings in respect of the Premises. Section 75A(7) relevantly provides that the Court may receive further evidence on appeal.

The evidence could only be relevant in so far as it relates to conduct on the part of the parties after the alleged agreement came into existence and would be admissible only to the extent that evidence of such conduct is admissible in order to determine whether or not the parties evinced an intention to be legally bound. The limited extent to which such material may be admitted is outlined above. The conduct in question occurred some two years after the alleged contract came into existence. Very little was said in support of the application. The application should be dismissed.

It follows from the conclusions set out above that the primary judge erred in concluding that there was no binding and enforceable agreement between the parties. Darzi was entitled to a declaration that there was a binding and enforceable agreement with Nolde for Nolde to grant a lease to Darzi of the Premises in the terms agreed by the correspondence. It is common ground that the 15 June Document evidences a lease in the terms agreed.

The appeal should be allowed. The orders dismissing the summons and ordering Darzi to pay Nolde’s costs of the summons [53] should be set aside. In lieu of those orders, there should be a declaration that, upon receipt by O’Brien Connors & Kennett of Pigott Stinson’s letter of 31 May 2016, Nolde as landlord and Darzi as tenant entered into an agreement for the lease of the Premises in the terms of the 15 June Document. There should be an order requiring Nolde to execute the 15 June 2016 Document, attend to the stamping and registration of that instrument under the Real Property Act, and furnish to Darzi a certified copy of the registered instrument as evidence of Darzi’s title. Nolde should be ordered to pay Darzi’s costs of its summons. Nolde should be ordered to pay Darzi’s costs of the appeal.

The orders that I propose are therefore as follows: