Are You Bound by the Terms of a Letter of Intent ?
- Aug 7 2013
Complex commercial transactions typically involve a back-and-forth negotiation of numerous terms of the agreement, a process which usually does not occur overnight. Accordingly, parties to a business or real estate purchase or lease transaction often first execute a letter of intent (LOI), which documents the parties’ intent to proceed with the negotiation of a full contract. The LOI includes the essential terms of the agreement, such as closing date and purchase price, and payment terms. However, detailed terms and conditions are reserved for the final, formal purchase agreement.
The LOI, with its brief description of sometimes only the most basic, essential terms, is generally not intended to be a binding contract. However, if it is not properly drafted, the parties could find themselves locked into a binding LOI. For example, the existence of elements required in an enforceable contract, such as the property description, price, closing date and payment terms in the case of an LOI for the purchase of real property, without expressly declaring the parties’ intent that it be non-binding, could constitute a valid contract.
While parties who enter into an LOI generally intend to consummate the transaction, if the LOI is deemed enforceable as a stand-alone contract, both parties may be subject to undesirable consequences. For example, the LOI often lacks essential contract terms such as indemnity clauses, warranties, financing arrangements, or any other detailed terms necessary to protect one or both parties. To ensure the LOI serves its intended purpose, it must contain a specific provision that states the LOI is intended to be non-binding until such time when a final agreement is executed by the parties.
What if you want parts of the LOI to be binding, regardless of whether the deal is finalized? Perhaps buyers want an enforceable provision stating that the seller will not offer to sell the business or property to others while the parties are in negotiations. A hybrid LOI can be drafted to ensure the negotiations, any confidential information, and final terms are not disclosed. Just as with the provisions stating the LOI is intended to be non-binding, the provisions that are intended to be binding must be carefully drafted to ensure they are enforceable and do not pose unintended consequences for other provisions within the document. A hybrid letter of intent can be a very effective tool in facilitating the purchase of a business or commercial real estate, but care must be taken to ensure it is drafted so that it serves its intended purpose.
The business law attorneys at Schneiders & Associates, L.L.P. can assist you in drafting your LOI so that it clearly reflects your desires and best interests. If you would like us to assist you in this regard, please give us a call.