Imagine for a moment a small business owner, “Sally”, is considering a new location for her business when she happens upon a small retail building that would serve as a perfect location for her future success. One problem. The building is not for sale. But Sally is eager to buy the property, and wants to show the property owner that she is serious about purchasing the building. The building’s owner wasn’t anticipating selling the property when Sally approached her but would consider selling it for the right terms. Together, both parties can write up a letter of intent, which is a document that details their wishes to enter into serious negotiations later.
Essentially, letters of intent are agreements to create an agreement in the future and are commonly used in the purchase of real estate, a business, or contracting for goods or services. Letters of intent outline important elements of what parties intend to have placed in a future agreement. They help to gauge how serious a party like Sally is about something. They include provisions addressing things like purchase price, timelines, confidentiality, exclusivity, financial considerations, property, or product condition.
Rushing to draft a letter of intent can have legal consequences. Letters of intent can create real legal problems and expensive litigation when one party, such as Sally, wants only to enumerate the beginnings of a future contract, but the other party, the building owner, now considers the language to be more than just an intent to negotiate, but rather, to Sally’s surprise, a binding agreement itself. In certain situations, courts have found that letters of intent that memorialize terms for an agreement later can be enforced as a binding contract.
Here are four things to do to avoid having a letter of intent litigated and enforced as a contract:
- Avoid Specificity. The more specific the terms, the more the letter of intent begins to look like the contract itself. For instance, in a letter of intent to lease, stating the lease term and payment would be sufficient, but detailing the various responsibilities of the landlord or tenant, or listing default remedies tends to appear more like a lease itself.
- Qualify the Language. Make sure that there is language in the letter of intent that clearly states: “This is not a legally binding contract.” Some legal experts go so far as to insert the language multiple times throughout the letter of intent. Without such language, courts will look at the surrounding circumstances and the parties behaviors to determine what the original intent was at the onset of negotiations.
- Have an attorney review or even draft the letter of intent. Some courts have found that where the elements of a contract are present in a letter of intent: an offer, an acceptance, mutual obligations and remedies—the more likely that it can be construed as a contract. The language is what counts and an attorney can ensure that certain elements of a legally binding contract are excluded from the letter of intent.
- Don’t sign the letter of intent. The recipient of a letter of intent shouldn’t sign it. If the proposal is enough to peak one’s interest, then the parties should instead engage in drafting terms for a contract with a qualified attorney.
The above items are the best ways for a letter of intent to remain non-binding and enforceable. Before creating “self-inflicted legal wounds” and endorsing a letter of intent, it is always best to consult with an attorney.
About the Author: David Soble has been a real estate and finance attorney for over 25 years. He has advised both business owners and consumers in thousands of real estate and business / finance transactions.
DISCLAIMER: This article is not intended to serve as legal advice. When it comes to legal concerns always seek the advice of an attorney.