In the recent decision by the Supreme Court in Moffatt Property Development Group Pty Ltd v Hedron Park Pty Ltd the Court has determined that a purchaser's letter of offer to purchase land, constituted a valid and binding agreement.
After several days of negotiations the purchaser wrote a letter to the vendor's agent outlining its final unconditional offer to purchase the property and requesting the agent put the offer to the vendor for its consideration. The letter of offer contained the following terms:
- purchase price $3,000,000;
- $500,000 non refundable deposit released when the vendor signs the contract;
- contract will be unconditional in the form of a put & call option;
- settlement to be 12 months from the date of contract; and
- the vendor is to remain responsible for the insurance of the property until settlement.
The letter was written on the purchaser's letterhead and requested the vendor sign and return the letter if acceptable, upon receipt of which, the purchaser would instruct its solicitors to prepare the relevant contract documents. Shortly after the vendor signed and returned the letter of offer, it received a better offer for the property and wished to avoid the deal by offering to pay the purchaser's costs incurred to that point. The purchaser did not accept the vendor's proposal and applied to the court for an order for the vendor to perform the contract.
Despite the fact the letter of offer did not expressly stipulate the terms of the contract or the put & call option (for example, the amount of consideration for the grant of the option or the timeframes for each party to exercise the relevant put or call options), or provide a copy of the standard contract documentation, the Court relied on the principle in Masters v Cameron to find the parties had completely agreed upon all the terms of their transaction even though performance of one of the terms of the offer was conditional upon the execution of a formal document (in this case a put & call option). The Court relied on the following facts in making this determination:
- The form of the letter was clearly suggestive of an intent to give rise to a binding agreement as it represented the purchaser's final offer and required the vendor to accept the offer by signing it and returning the letter to the purchaser;
- The vendor's offer to pay the purchaser's costs in order to avoid the deal was indicative of the defendant's belief it had reached a form of agreement with the purchaser; and
- The letter of offer made no reference to the deal being subject to or conditional upon the execution of contract documents.
We do not think this decision is sound and expect it to be overturned on appeal. However, the practical consequences of this decision are profound for vendors, their agents, and purchasers of real property, as well as landlords and tenants who negotiate the commercial terms of a transaction by way of a formal letter of offer without first seeking legal advice. Consideration should be had as to whether you intend to become bound upon communication of acceptance of the terms of the letter of offer, or upon execution of more substantive contract or lease documentation. If you do not wish to be bound to a transaction upon signing a letter of offer, the easiest way to avoid any uncertainty is to ensure that this type of correspondence contains a paragraph along the following lines:
"...The [Vendor/Purchaser] does not intend to be bound to the transaction of sale and purchase until a contract in a form satisfactory to it is entered into by the parties..."
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