We see in retail leases the phrases, “the parties agree to agree on…” and “the parties will discuss and agree on…” But what if they don’t agree? How can a court (if the matter gets to court) decide on what they ought to have agreed upon? That being the case; what’s the outcome?

This article by Deren Hassan, Partner at Mills Oakley, was first published in SCN magazine Vol. 40 no.5.

Leases, by their very nature, document parties’ rights and obligations into the future. In some instances, leases may be for a term of five years, decades or longer if there are options that are exercised. As such, when entering into leases, it is important for the parties to consider and make provision in their agreement in case of future events, matters or circumstances, even though they may never arise or occur.

There is a legal distinction between a provision in a lease agreement that contains a mechanism to enable the parties to deal with and determine future matters, and an ‘agreement to agree’, which contains no enforceable mechanism or default position, or where the mechanism is defective.

In the recent case of Shogroup Hotels Pty Ltd v Harris Street Holdings Pty Ltd [2022] NSWSC 1119, the NSW Supreme Court considered if an obligation to negotiate future rent was enforceable. The decision involves an analysis of whether a dispute resolution clause in the lease could be utilised as the mechanism to determine future rent, or if the absence of an articulated mechanism for this specific purpose reflected the parties’ failure to complete their agreement with the required degree of certainty.

The matter
The case concerns the lease of the Dunkirk Hotel in Harris Street, Pyrmont NSW, which was entered into in January 2020. After the outbreak of the COVID-19 pandemic, on 3 July 2020, the parties entered into a ‘Deed’ recording the terms upon which relief was given to the lessee in respect of its payment obligations under the lease. The Deed, which operated to vary the lease, provided that during the period commencing 15 March 2020 and expiring 27 September 2020, the lessee’s obligation to pay rent under the lease was reduced by 75%, including a waived proportion and a deferred amount to be paid by 48 monthly instalments over a four-year period.

The Deed in clause 10 further provided as follows:

‘The parties agree that if the COVID-19 pandemic escalates such that additional restrictions are imposed which would prevent the Tenant being able to trade in the manner it did prior to the date of this Deed then the parties will meet to discuss and agree upon an additional rent reduction and extension of the Adjustment Period’ (emphasis added).

At the beginning of the six-month Delta lockdown in July 2021, the lessee sought to invoke clause 10 of the Deed to discuss and agree upon the future rent payable under the lease. The parties were unable to reach agreement despite attending mediation via the Office of the Small Business Commissioner.

The primary question
The primary question before the court was whether the obligation ‘to discuss and agree’ in clause 10 is unenforceable as an ‘agreement to agree’. This is because an agreement to agree without anything more is considered to be an incomplete agreement that lacks certainty and cannot be enforced:

‘The courts will not lend their aid to the enforcement of an incomplete agreement, being no more than an agreement of the parties to agree at some time in the future.’ i

Lessee’s contentions
The lessee contended that any uncertainty or incompleteness inherent in clause 10 could be overcome by means of the ‘machinery’ for expert determination provided for in clause 28 of the lease.

The lessee argued that as clause 10 required the parties to ‘discuss and agree’ on the future rent, the failure to reach agreement means that the parties’ obligations and the operation of clause 10 had been discharged. Accordingly, the rent dispute could be referred for determination by an expert because the object of negotiations under clause 10 is to resolve a dispute about an existing bargain and its performance, and that a dispute about the operation of clause 10 is a dispute arising under the lease.

Lessor’s contentions
The lessor submitted that a change in rent pursuant to clause 10 can only arise if the parties agree to that effect and that the imposition of any change in rent by expert determination is inconsistent with clause 10.

This meant that the mere failure of the parties to reach an agreement pursuant to clause 10 exhausts the operation of the clause and that consequently, no dispute arises as to the operation of the clause.

The decision
The court agreed with the lessor in deciding that the mere failure of the parties to reach an agreement pursuant to clause 10 does not give rise to a dispute of a kind that triggers the operation of the dispute resolution clause in the lease.

Significantly, the lease dispute resolution clause itself did not provide any mechanism or ‘objective framework’ii by which an expert could determine the amount of rent payable:

‘Would the expert be deciding what agreement ought to have been reached between the parties? If so, what criteria would the expert employ in reaching a conclusion? Would the expert be deciding the matter on some other basis? If so, upon what basis? The matter seems to me to be most uncertain’.iii

The court said the circumstances may be different if the conflict between the parties was whether an agreement as to the future rent payable had been reached under clause 10. A conflict about whether or not an agreement had been reached would be a dispute that arises for the purposes of the lease dispute resolution clause.

However, the parties’ failure to agree to a mechanism that enables the determination of the future rent does not give rise to a dispute that is suitable for expert determination.

Ultimately, the court held the obligation to ‘discuss and agree’ is unenforceable as an ‘agreement to agree’ and that the uncertainty and incompleteness inherent in clause 10 is not overcome by means of the dispute resolution ‘machinery’ contained in the lease.

The failure to agree to a mechanism simply meant that there could be no change in the terms of the future rent payable under the lease.

Key lessons
Parties to a lease can ‘agree to agree’ to determine future matters so long as appropriate language is incorporated for that purpose and there is an identified basis for fulfilling that purpose. This can include a specified default position if the parties do not reach agreement; a broad obligation to negotiate in good faith; reference to certain principles, criteria, guidelines, formulas, protocols or standards; a decision being made at the absolute discretion of a third party; an expert determination, arbitration and any other form of alternative dispute resolution.

It is the absence of an identifiable ‘mechanism’, ‘machinery’ or ‘objective framework’ for determining future matters that makes ‘agreements to agree’ unenforceable for lack of certainty. It ‘does not matter what a party believes he or she agreed to. The hopes, aspirations, mistakes and misconceptions that a party might have about the meaning or effect’ iv of the lease terms is not relevant. In determining the terms of a lease, ‘the court will not substitute machinery of its own for machinery provided by the parties, however defective that machinery may prove to be’.v

Lessors and lessees must be clear about how future matters are to be determined in leases to ensure the terms of their agreements are complete, certain and capable of interpretation by a reasonable businessperson in the position of the parties.

i Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd [1982] HCA 53.
ii Shogroup at paragraph 31.
iii Ibid
iv Casquash Pty Ltd v NSW Squash Limited (No 2) [2012] NSWSC 522, paragraph 3.
v Sudbrook Trading Estate v. Eggleton (1983) 1 AC 444 at pp 459-460.