The risk with relying on oral agreements

This update continues on from our earlier update concerning a restaurant lease at the Crown complex in Southbank, Melbourne, where the High Court of Australia held that tenant could not rely on a promise by the owner that it would be ’looked after at the time of renewal’ (Crown case). The court found that the tenant’s claim, based on the equitable principle of “promissory estoppel” could not succeed because, on the facts of that particular case, the promise was not sufficiently detailed and that no reasonable person would have relied on it.

Caringbah case

By contrast, the New South Wales Court of Appeal, in the recent case of Caringbah Investments Pty Ltd v Caringbah Business and Sports Club Ltd (in liq) [2016] (Caringbah case), upheld a tenant’s claim based on promissory estoppel.

In this case, Caringbah Investments, as landlord, and Caringbah Business and Sports Club, as the tenant, executed a lease, but before doing so made an oral agreement that the rent in the first three years of the term would be $20,000 less per annum than what was noted in the lease. These rent reductions would apply if a merger between the tenant and the Cronulla Sharks leagues club did not eventuate. The landlord, however, required the higher rent amounts to be noted in the lease.

The appellant court held the representations made by the landlord were recognised as a contractual promise. The court also had to consider whether the tenant entered into the lease in reliance upon the representation. The court acknowledged that ‘reliance is a fact to be found, not to be presumed’. The court found the tenant executed the lease in reliance upon the representations and the landlord was therefore ‘estopped’ from enforcing the higher rent amounts contained in the lease. In other words, the landlord was bound by the oral promise, even though it was not mentioned in the signed lease.

The differences between Crown and Caringbah

The key difference between the Crown case and the Caringbah case lies in the facts.

In the Crown case, Crown’s representation to the tenant that it would be ’looked after at renewal time’ was ambiguous and lacked all of the essential terms necessary to create a contractual promise that would constitute a renewal of the lease. Whereas, in the Caringbah case (despite the representations being made orally and minutes of the meeting not being recorded) the facts of the case indicated that both parties agreed upon the specific terms that would trigger the lower rent amounts, notwithstanding the subsequent and inconsistent written terms of the lease.

Another key difference is that in the Crown case, the majority court did not go so far as to consider the element of ‘reliance’ resulting in the tenant’s detriment because there was no contractual promise found. Instead, the majority held that the landlord’s representation did not have the quality of a contractual promise of any kind. Conversely, ‘reliance’ was considered in detail in the Caringbah case, as the court found the oral representation was a contractual promise. On that basis, it was then necessary to consider whether the tenant acted in reliance on the promise, which was to their detriment. The court, in the Caringbah case, held the tenant relied on the landlord’s promise of lower rent and proceeded with entering into the lease on that basis. In making this conclusion, the court considered various forms of evidence given in court, including an affidavit and cross examination of the directors of the tenant along with consideration of the fact that the lower rent amounts were paid and accepted for the first 12 months of the lease term.

Common mistake and rectification 

Prior to considering the principle of promissory estoppel, the appellant court in the Caringbah case addressed the principles of common mistake and rectification. Under this principle, where it is clear that the formal contract is wrong, as a result of a mistake that both parties have made, the court can order that the contract be “rectified”. In the Caringbah case, neither party argued that a common mistake had been made, and since there was no common mistake in the contract, there could be no remedy of rectification for the tenant. The court made it clear that rectification would not be granted where prior agreement was intentionally ‘left out’ of a written agreement.

As previously concluded in earlier update, it is important that all representations and promises made during negotiations between the parties are included in the formal documentation process. Sometimes a separate oral promise can be enforceable, as in the Caringbah case, but it depends very much on the circumstances. It is far better to ensure all those promises are included in the contract than to risk expensive court proceedings when the promise is dishonoured!

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