In 2020, Sentinel Property Group Pty Ltd and ABH Hotel Pty Ltd entered a heads of agreement (HOA) with a proposed option for the plaintiff to purchase the site of the Airlie Beach Hotel from the defendant. A handwritten clause in the HOA stated that the option was subject to the defendant obtaining the mortgagee’s consent to the sale within a defined due diligence period. The hotel was subject to two mortgages, one with the Commonwealth Bank of Australia (CBA) and the other with Oncore Pty Ltd (Oncore).

The defendant sought consent from Oncore shortly before the due diligence period was about to expire, which Oncore refused. The defendant enquired to the plaintiff whether they might accept to mutually terminate the agreement. The plaintiff refused and lodged a caveat. The defendant sought consent by CBA and was refused the day before the due diligence period was to expire. On the grounds that they were unable to obtain the consent of the mortgagees, ABH Hotel Pty Ltd terminated the agreement.

Issues

In determining if the termination was ineffective, the question is whether there was an intention to be bound upon execution of an agreement. This included assessing whether the HOA was a binding agreement itself.

The plaintiff submitted that an implied term was present in the HOA that the defendant would take all reasonable steps to seek the mortgagees’ consent and which had been breached, therefore making the defendant’s termination ineffective. The defendant disputed that no implied term existed or binding option was created.

Whether the defendant was in breach of the HOA in the manners alleged was to be determined. The manners in question included the the defendant’s delay in approaching the mortgagees, failure to communicate to the mortgagees that their interests would be discharged by the proposed sale and failure to put other matters to the mortgagees, had caused consent to be withheld.

Decision

The court determined that the HOA was an agreement because it was definitive and contained all fundamental terms to the transaction. Therefore, there was an intention to be bound. The court rejected the seller’s claim that the HOA was a binding agreement to negotiate the terms of the three other anticipated instruments (call-option agreement, contract of sale and leaseback).

The HOA was expressed as a valid, binding agreement, giving rise to a binding option to purchase the hotel. The option was subject to the handwritten clause entitling the defendant to terminate if they were unable to obtain the mortgagees’ consent by the due diligence date. It was held that the importance of the consent made it reasonable to imply that the parties take such steps as were “objectively required and reasonable to achieve the end specified by their agreement”.

However, the court accepted that the defendant’s conduct in approaching the mortgagees, had not been unreasonable. The defendant was not obliged to exhaust “all possibilities that might have led to consent being given”. Furthermore, the mortgagees were unlikely to give consent even if the defendant had approached them earlier, as Sentinel Property Group Pty Ltd’s purchase price would be insufficient to discharge the mortgagees’ interests. The court held that the defendant had validly terminated the agreement and dismissed the plaintiff’s claim.