Real estate letters of intent (LOIs) set forth economic terms, provide a checklist of the basic substantive terms, and serve as the starting point for attorneys to draft the formal agreements. Put differently, LOIs are the preliminary understandings of parties who intend to enter into a contract in the future “if the deal works out.’” The LOI should not be intended to be a binding contract.
All that said, the parties may want the LOI or some portions of it to be enforceable. If this is the case, then the parties should draft the LOI with express statements to make that determination. Generic or implied terms and conditions may be insufficient to convey the parties’ agreement that certain terms are enforceable. Courts often use certain language to find that an LOI is not binding including:
- Expressly statements that the LOI is Nonbinding/Not contractually or legally binding on the Parties—in the title and/or in the body of the document.
- Expression of the parties’ desire to negotiate the formal agreement in the future based on the terms and conditions set forth in the LOI.
- Acknowledgement and agreement that the LOI does not include all the material terms that would be included in the formal agreement and, therefore, the LOI is not a binding contract.
- Prohibition on reliance on the LOI or any discussions regarding the transaction as a commitment, offer or agreement of the other party.
- Specification as to which provisions, if any, are binding after execution of the LOI.
- Preliminary expression of general intent and to be used for general discussion purposes only. It is not an offer, acceptance, or a contract.
- Clear statement there is no duty to conclude a formal agreement. And/or a party may unilaterally terminate negotiations without liability.
On the other hand, many courts have ruled an LOI is binding by employing certain factors such as:
- Inclusion of all material terms, including representations and warranties.
- Statements that the parties will be bound by commercially reasonable and customary practices in determining their representations and covenants.
- Clear language that the failure to achieve a more complete formal agreement will not limit enforceability of the LOI.
A non-binding LOI does not mean that the parties can act however they want. Certain obligations exist as a matter of law. In particular, parties are required to act in good faith at all times Other provisions may be inserted into the LOI to curtail improper behavior. These provisions typically are specifically stated to be binding even if no formal deal is consummated:
- Confidentiality or Non-Disclosure
- Non-Circumvention
- Exclusive Negotiation Agreement
Finally at a minimum it is imperative that you have an experienced real estate attorney review the LOI before it is signed. Ideally, your real estate attorney drafts the initial LOI regardless of whether you are the buyer or seller. “Standard forms” are traps! But you knew this already.
David Seidman is the principal and founder of Seidman Law Group, LLC. He serves as outside general counsel for companies, which requires him to consider a diverse range of corporate, dispute resolution and avoidance, contract drafting and negotiation, and other issues.
He can be reached at david@seidmanlawgroup.com or 312-399-7390.
This blog post is not legal advice. Please consult an experienced attorney to assist with your legal issues.
Photo credit: The Basics of a Letter of Intent
