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New High Court case: Landlord’s promise to renew leases does not give rise to collateral contract or promissory estoppel

26 July 2016

#Dispute Resolution & Litigation

Toby Boys

Published by Toby Boys, Wylie Thorpe

New High Court case: Landlord’s promise to renew leases does not give rise to collateral contract or promissory estoppel

A majority of the High Court recently held that the Victorian Court of Appeal erred in finding that a statement made by a commercial landlord to a tenant that it would be “looked after at renewal time” (the statement) could give rise to a claim for promissory estoppel.[i] The High Court affirmed the finding of the Court of Appeal that the statement also did not give rise to a collateral contract.

The decision affirms that statements made in pre-contractual negotiations that are vague, ambiguous or simply encouraging will not be enforceable in contract or equity. While the landlord was not liable in this case, the case is a timely reminder to both commercial landlords and tenants to be cautious about providing and relying upon encouragement and assurances made outside the terms of an agreement. Even if representations do not form part of the contract and are not subject to ‘promissory estoppel’, there is a significant risk that landlords and their agents may fall foul of the “misleading and deceptive conduct” provisions of the Australian Consumer Law.

Background to the case

The Appellant (the landlord) is the owner of the Melbourne Casino and Entertainment Complex. The Respondents (the tenants) held two leases limited to a term of 5 years. The leases required the tenants to undertake extensive refurbishments. The landlord did not renew the tenants’ leases following a tender process and gave notice requiring the tenants to vacate the premises on the expiration of the leases. The tenants subsequently became insolvent due to write-downs of more than $2 million in the value of the refurbishments.

The tenants alleged that, in order to induce them to enter into the leases with a short 5 year term, a series of statements were made orally to the tenants by the landlord amounting to a promise that the landlord would renew the leases for a further 5 years if they undertook the extensive refurbishments.

In proceedings brought by the tenants in July 2010, the Victorian Civil and Administrative Tribunal (VCAT) found that the landlord had made the statement.[ii] VCAT determined that the statement gave rise to a collateral contract that required the landlord to offer the tenants further 5-year leases. In the alternative, VCAT considered that the landlord was estopped from denying the existence of the collateral contract.

The primary judge[iii] and the Court of Appeal of the Supreme Court of Victoria[iv] held that the statement did not give rise to an enforceable obligation pursuant to a collateral contract. In addition, the primary judge held that no estoppel arose. However, on appeal, the Court of Appeal held the statement by the landlord founded a promissory estoppel and remitted the claim back to VCAT to determine the appropriate relief.

The landlord appealed to the High Court and special leave was granted on the question of whether the statement could give rise to a claim for promissory estoppel. The tenants cross-appealed and special leave was granted on the issue of whether the statement amounted to a collateral contract.

Did the landlord’s statement give rise to a collateral contract?

A representation made in the course of negotiations may result in an agreement which is “collateral” to the main agreement if the parties intended the representation to be contractually binding. The court will determine the intention of the parties by what a reasonable person in the position of the parties would have understood to be intended by the representation.[v]

The High Court upheld the Court of Appeal’s finding that the statement did not amount to a collateral contract as a reasonable person in the position of the parties could not have understood the statement to amount to a binding contractual promise to renew the leases. The High Court affirmed the finding by Hargrave J of the Supreme Court of Victoria that the statement was no more than "vaguely encouraging”.[vi] 

The High Court affirmed that even if the statement were considered to be a promise, it was illusory and unenforceable because it left the essential terms and conditions of the renewed leases to the landlord’s discretion. As a result, even if the statement was incorporated into the tenants’ leases, it would have been unenforceable as it was not sufficiently certain.[vii] The decision reinforces the basic principle that there can be no enforceable agreement to renew a lease, breach of which will result in damages, unless at least the essential terms of the lease have been agreed.[viii]

Was the landlord estopped by the statement made to the tenants?

The doctrine of promissory estoppel can extend to representations made in pre-contractual negotiations. In all cases it is necessary to establish that the representation is clear and as a result of relying on the representation the other party placed himself or herself in a position which would result in material disadvantage if person making the representation later sought to depart from the representation.[ix]

A majority of the High Court found that the statement did not give rise to a promissory estoppel. The statement that the tenants would be "looked after at renewal time" was not capable of conveying to a reasonable person that the tenants would be offered a further lease at renewal time. Justice Keane considered it would reduce “the law to incoherence if a representation, too uncertain or ambiguous to give rise to a contract or a variation of contractual rights and liabilities, were held to be sufficient to found a promissory estoppel.[x] His Honour emphasised that there was a need for certainty in commerce as to the terms on which parties have agreed to be bound and to when the bargaining process had concluded.[xi]

The High Court further held that it could not be shown that the tenants acted on the basis of an expectation in the terms identified by VCAT, namely, that the tenants would be offered further 5 year leases at renewal time on terms to be decided by the landlord. In contrast, the tenants submitted that, based on the statement, they considered that there would be a renewal of leases, or an offer of renewal, on the same terms and conditions as the original leases. The High Court considered that the tenants could not establish they had acted on the basis of the expectation identified by VCAT and, as such, a claim in estoppel was bound to fail.

What does this mean for you?

  1. Where commercial parties are experienced and represented in pre-contractual negotiations, the Court will be reluctant to find the existence of a collateral contract or promissory estoppel when the conduct of the parties (including pre-contractual representations) are viewed objectively. The Court will place significant weight on the need for certainty as to the terms on which the parties have agreed to be bound.
  2. Commercial tenants should ensure discussions regarding the essential terms of a lease are incorporated into the lease agreement in certain terms from the outset. A commercial tenant should not rely or make commercial decisions based on encouragement and assurances provided by landlords in pre-contractual negotiations if those statements are not then incorporated into the lease.
  3. Although the statement was found not to be enforceable in contract or under the equitable principles of promissory estoppel, the case is a timely reminder to commercial landlords to be cautious in providing encouragement and assurances outside the terms of a lease. To do so, may lead to uncertainty and later disputes with a tenant as to the terms of the lease or whether the representations amounted to “misleading and deceptive conduct” under section 18 of the Australian Consumer Law.

Disclaimer

The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this publication is accurate at the date it is received or that it will continue to be accurate in the future. We are not responsible for the information of any source to which a link is provided or reference is made and exclude all liability in connection with use of these sources.

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[i] Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26, by a majority French CJ, Kiefel, Bell, Keane, Nettle JJ. Gageler and Gordon JJ dissenting in respect of the cross-appeal holding that collateral contract found by the VCAT was not illusory as it was an agreement to make an offer and the appellant was under an obligation to make an offer of the kind promised.

[ii] Cosmopolitan Hotel (Vic) Pty Ltd v Crown Melbourne Ltd [2012] VCAT 225; in respect of damages see

Cosmopolitan Hotel (Vic) Pty Ltd v Crown Melbourne Ltd [2013] VCAT 106; Fish and Company (Vic) Pty Ltd v Crown Melbourne Ltd [2013] VCAT 105.

[iii] Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd [2013] VSC 614.

[iv] Cosmopolitan Hotel (Vic) Pty Ltd v Crown Melbourne Ltd (2014) 45 VR 771.

[v] See Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 61-62 per Gibbs CJ; [1984] HCA 64; see Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26, [22] per French CJ, Kiefel and Bell JJ.

[vi] Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd [2013] VSC 614 at [38]-[39]; Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26, [23]-[24] per French CJ, Kiefel and Bell JJ.

[vii] Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26, [130] per Keane J.

[viii] Thorby v Goldberg (1964) 112 CLR 597 at 607; [1964] HCA 41; Beattie v Fine [1925] VLR 363, referred to in Placer Development Ltd v The Commonwealth (1969) 121 CLR 353 at 360; [1969] HCA 29; see Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26, [31] per French CJ, Kiefel and Bell JJ.

[ix] Legione v Hateley (1983) 152 CLR 406; [1983] HCA 11.

[x] Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26, [143] per Keane J.

[xi] Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26, [143] per Keane J.

Toby Boys

Published by Toby Boys, Wylie Thorpe

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