I feel the need . . . the need for a deed

A lease is a lease is a lease, yes?  Well, not always.  If a lease is expressed to be in the form of a deed, then (amongst other consequences) a party who has signed and delivered the lease cannot withdraw their acceptance and “recall” (or back out of) the agreement to lease the premises, even if the other party has yet to accept.

This was demonstrated in a recent case in the Supreme Court of New South Wales, which concerned the sublease of premises in the Aurora Place building in Sydney’s CBD. On 15 August 2017, the solicitors for the prospective tenant sent two copies of an executed sublease to the solicitors for the landlord.  However, on 24 August 2017, the solicitors for the prospective tenant sent a further email to the solicitors for the landlord which included the following words:

“We are instructed to request that you do not arrange for the landlord to sign the lease at this stage, and that you hold the lease signed by the tenant in escrow pending further communication from us”.

The landlord signed the sublease on 25 August 2017 (that is, after the “hold your horses” email above had been received).  The tenant argued that no binding lease had come into existence; the landlord argued to the contrary.  The landlord’s primary case was that the sublease was in the form of a deed which had been “delivered” on 15 August 2017.  Because a deed which has been “delivered” cannot be “recalled”, the email of 24 August 2017, said the landlord, did not prevent the landlord from subsequently executing the delivered deed and thereby creating a binding sublease.

Although the signing blocks on the sublease did not provide that the sublease was to be executed as a deed (and did not, for example, use the words “signed, sealed and delivered”), the sublease contained the following provision:

“19.20 This Lease is a deed, even if it is not registered.”

In circumstances where this provision was contained in the initial draft of the lease, and had not been varied in the subsequent negotiations between the parties, the Court found that clause 19.20 was “more than a mere description of the instrument. It is a substantive provision, chosen by the parties, that is directly concerned with the nature and manner of operation of the sublease”.  The consequence was that the “label” which the parties applied in clause 19.20 pointed strongly towards the conclusion that the sublease was intended to operate as a deed.

The next question was whether the lease had been executed as a deed, even though the signature block of the lease did not make any express reference to the document being a deed.  To answer this question, it was necessary for the Court to consider section 127(3) of the Corporations Act 2001 (Cth). Section 127(3) provides:

“A company may execute a document as a deed if the document is expressed to be executed as a deed and is executed in accordance with subsection (1) or (2).”

Again, clause 19.20 was decisive; because that clause provided that the lease was a deed, it was unnecessary for the lease to include “executed as a deed” (or some similar words) in the the execution clause.

The final issue was whether the deed had been “delivered”.  This was not a question of asking for a delivery docket; as the Court noted, “It is not necessary, for delivery of a deed, that there be a physical delivery of the executed instrument. Equally, a physical delivery of an executed deed does not necessarily amount to a delivery.”  Rather, the question is one of intention; does the party delivering the deed intend to be immediately bound?  On an analysis of the parties’ negotiations, the Court found that the prospective tenant did intend to be immediately bound – which meant that there had been delivery, so that it was not then open to the prospective tenant to withdraw their acceptance after delivery had occurred, even if that withdrawal occurred before the landlord had executed the sublease.  Consequently, the “prospective tenant” had become a tenant; the Court will now assess the damages payable by the tenant for breach of the lease.

Although this case concerned a sublease, deeds are used in a wide variety of circumstances, so the finding in this case of of wide application.  The lesson is that parties will need to pay close attention to the form in which an agreement is recorded as well as to the agreement’s terms.  Ovid observed that, “Men do not value a good deed unless it brings a reward”, but as a misunderstood deed can only bring the reward of litigation, there is value in understanding the difference between the need for speed and the need for a deed.

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May 16
Litigation and dispute resolution Property Law