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Proprietary Estoppel in an Oral Lease Agreement due to “Family Honour”
It is timely to revisit the equitable principle of estoppel that steps in to provide relief to a party where one party acts to its detriment and alters its position such that it would be prejudiced if the other party departed from the expectation that was created or encouraged. The case of Doueihi v Construction Technologies Australia Pty Ltd  NSWCA 105 seems to be a surprise result given a long line of cases that has struggled to succeed in claims of estoppel in commercial leases where there is a lack of detail of the agreed leasing arrangement.
However, the circumstances of this case differ from the context of usual commercial negotiations and where, as such, the expectation of the party differs from an experienced commercial operator. One of the significant factors in this decision is that the parties were related, being members of the same family.
- Mr Hogan (the director and major shareholder of Construction Technologies Australia Pty Ltd (CTA) had initiated discussions with the four appellants (co-owners) about purchasing certain property and then granting a lease to CTA. Three of the four co-owners were Mr Hogan’s wife, mother-in-law and sister-in-law (the Vatselias family).
- Mr Hogan was the driving force behind the purchase including with respect to all finance arrangements, the construction and design of the building on site.
- The parties agreed that on completion the co-owners would grant CTA a lease for five years with an option of further five years. However, the family elected not to formalise the lease and instead relied upon the “honour of the family” to uphold the agreement, as per their usual practice.
- Mr Hogan and CTA then spent almost one million dollars on installation of plant and equipment in the Premises. The parties understood the significant cost for CTS in paying for the fitout and the difficulties in effecting its removal.
- Mr and Mrs Hogan separated shortly after the construction was completed and CTA sought to formalise the agreement.
- The co-owners refused to honour the previously agreed terms and would only offer CTA a short-term lease at a 40 per cent increase in rent. The co-owners then issued a notice to quit, and Mr Hogan initiated proceedings shortly thereafter.
Findings and Conclusions:
- Although Mr Hogan had never assumed that a particular legal relationship existed between the parties, the Court held that the arrangement created an equitable propriety estoppel and it would be unconscionable if the respondents were allowed to dishonour the agreement.
- The co-owners’ actions/inactions encouraged an expectation in the relying party, and as such, CTA had a proprietary interest in the land – rather than a contractual relationship with the respondent. by applying the principal of equitable estoppel.
- The question of whether proprietary estoppel had arisen was based on the circumstances of the case, the nature of the assumption and whether it was reasonable to rely upon it.
- The fact that the Vatselias family had a history of not formalising lease agreements in family arrangements contributed to the finding that it was reasonable for Mr Hogan to rely on the assumption that the representation of the Vatselias family would be sufficient, even though the lease agreement was incomplete and there was a lack of detail.
- Parties must be mindful of all conduct in negotiations and spell out their intentions at the outset.
- Unless the circumstances are exceptional, as shown in this case, it is best to formally document all lease arrangements in writing.