Keep your head (with your Heads of Agreement)

What is a Heads of Agreement and when is it used?

In the leasing context, a Heads of Agreement (HOA) is a document signed by a landowner and a tenant in preparation for execution of a formal lease document. Generally, a HOA sets out the key commercial terms of the proposed transaction, such as the:

• details of the premises and the permitted use
• duration of the term and any options for further terms
• financial terms such as rent, rent incentives and rent review mechanisms.

A HOA is used during the negotiation stage of a lease. It allows the parties to formally recognise the key terms which have already been agreed, while negotiations take place in relation to the detail of the formal lease document.

Are Heads of Agreement binding?

Whether a HOA is binding depends on the circumstances and in particular, the objective intention of the parties¹, applying the well-known principles set out in Masters v Cameron.²

The recent Victorian Supreme Court case of Casdar Pty Ltd v Fanous³ demonstrates that a HOA will not always be binding on the parties. In that case, Croft J held that the parties did not consider themselves bound by the HOA based on:

• the written terms of the HOA
• the failure of the prospective landlord to comply with obligations in the Retail Leases Act 2003.

Accordingly, the prospective tenant was not required to enter into a formal lease on the same terms.

The legal risks of entering into a HOA

A HOA can certainly be a useful tool for prospective landlords and tenants, as it provides reassurance to the parties that the key terms have been mutually agreed, there is a "meeting of the minds" on the key commercial issues and that the subsequent lease will be based on the agreed terms.

Often tenants enter into an HOA and only seek legal advice in relation to the final lease document. It can be very useful for a potential tenant to obtain legal advice before signing an HOA:

1. Whether an HOA is binding will depend on the objective intention of the parties. This requires an analysis as to whether the terms contained in the HOA and the conduct leading up to its execution will be sufficient to conclude that it is a legally binding document. It can be prudent to obtain a legal opinion to confirm that the HOA reflects your intention as to whether or not the arrangement is to be legally binding.
2. A HOA often states that the subsequent lease document must be prepared in the form provided by a specific template, such as the Real Estate Institute of Victoria or Law Institute of Victoria Commercial Lease template. Different templates have different risk profiles - some templates benefit a landlord whereas others feature a more equal allocation of risk. Using an unsuitable precedent as a starting point for the lease negotiations reduces flexibility, increases legal costs and the time taken to resolve the lease terms and conditions.
3. HOAs can often be quite lengthy and detailed documents, which set out the crucial terms of the proposed lease. The more detail that is included in an HOA, the less flexibility a tenant will have to negotiate the terms of the final lease agreement. Seeking legal advice before signing a lengthy and detailed HOA can assist to ensure that no unintended legal or commercial consequences will flow from the terms agreed in the HOA at the outset, particularly if the HOA is expressed to be binding on the parties.

Contact our team

If you require legal advice regarding a lease or HOA, please contact us.

Anthony Leggiero
Lead Counsel
T: 0457 417 813
E: anthony.leggiero@vgso.vic.gov.au

Margaret Marotti
Managing Principal Solicitor
T: 0408 311 426
E: margaret.marotti@vgso.vic.gov.au

Elizabeth Wortley
Principal Solicitor
T: 0409 348 806
E: elizabeth.wortley@vgso.vic.gov.au

¹ Casdar Pty Ltd v Fanous [2017] VSC 616 [21], citing Tasman Capital Pty Ltd v Sinclair (2008) 75 NSWLR 1.
² (1954) 91 CLR 353
³ [2017] VSC 616.