“Time kills all (commercial) deals” – Fred Richman.
Most real estate investors/developers feel the way Mr. Richman (this author’s father and favorite real estate client) does. Since the time from handshake to signed purchase agreement can range from weeks to months, many commercial buyers/sellers and landlords/tenants feel the need for some written semblance of a deal in the interim. Typically, an agreement in principle, or “letter of intent (LOI)” is signed which details agreed basic terms (e.g. price, payment terms) but conditions the parties’ obligations on preparing/executing a more formal, definitive contract. Frequently, the LOI is crafted without legal assistance or review, and ranges from paragraphs to pages in length. Other considerations such as outlining the deal for lenders, avoiding full disclosure requirements or establishing an exclusive negotiation period may also dictate the need for a LOI.
Most real estate investors/developers feel the way Mr. Richman (this author’s father and favorite real estate client) does. Since the time from handshake to signed purchase agreement can range from weeks to months, many commercial buyers/sellers and landlords/tenants feel the need for some written semblance of a deal in the interim. Typically, an agreement in principle, or “letter of intent (LOI)” is signed which details agreed basic terms (e.g. price, payment terms) but conditions the parties’ obligations on preparing/executing a more formal, definitive contract. Frequently, the LOI is crafted without legal assistance or review, and ranges from paragraphs to pages in length. Other considerations such as outlining the deal for lenders, avoiding full disclosure requirements or establishing an exclusive negotiation period may also dictate the need for a LOI.
The question buyers, sellers, landlords, tenants and their attorneys must answer before utilizing an “off the shelf”, form letter of intent is: what is the intent of their letter of intent? Some parties intend to be bound by the letter of intent, while others utilize same merely for initiating or monopolizing negotiation with the other party. Under Ohio law, both parties must have a clear understanding of the terms of the agreement and an intention to be bound by its terms before an enforceable contract is created. Arnold Palmer Golf Co. v. Fugua Industries, Inc. 541 F.2d 584 (6th Cir. 1976); Normandy Place Assoc. v. Beyer, 2 Ohio St. 3d 102, 105-106 (1982) (“The enforceability of [an agreement to make an agreement] depends… on whether the parties have manifested an intention to be bound by its terms and whether these intentions are sufficiently definite to be specifically enforced”). Unless absolutely clear in the LOI, however, the intent of the parties will be based on a fact finder’s (judge or jury’s) evaluation of not only the language itself, but the circumstances surrounding the language. The problem is that juries, for example, may not be familiar with contract formation language or the difference between final agreements and letters of intent. The fact finder certainly will not have a better idea of the parties’ intentions than the parties themselves, but will have the power to nonetheless, make the call.
In the Arnold Palmer case, the initial agreement in question clearly had as a condition, a later, definitive agreement to be prepared between the parties. The District Court (lower court) in “Palmer” found for the Defendant, reasoning that there could be no breach of contract claimed by the Plaintiff, because no final contract was created by signing their conditional, agreement to agree. The Sixth Circuit in Palmer reversed the District Court’s decision, determining that the initial agreement was a six page, detailed contract, with enough contract language to send the issue back to the lower Court to determine intent. Clearly, the Defendant in Palmer intended the initial agreement to be no more than an “agreement to agree”, and the Plaintiff intended the contract to have been virtually finalized at the initial agreement stage.
Courts will often look to determine whether or not essential terms of the deal are spelled out in an LOI (or other initial agreement) to help determine the undeclared intent of the parties re: enforceability. In the context of leases, the fact that terms such as maintenance and repair obligations, buildout obligations, indemnity provisions, default provisions and insurance terms were missing from a letter of intent led the Court in Joseph v. Doraty, 77 Ohio L. Abs. 381 (1957) to the conclusion that since material lease terms were missing, no final lease agreement was reached at the LOI stage. See also Cannon Rd. LLC v PSC Metals, 2002 Ohio App. LEXIS 5876 (8th Dist.).
As a result of these cases, {and contract law cases confirming general requirements for contract formation, such as offer and acceptance, consideration, meeting of the minds and certainty as to essential contract terms [See, e.g., Nilavar v Osborn, 711 N. E. 2nd 726 (Ohio Ct. App, 2nd Dist.1998)], parties intending to be legally bound by a letter of intent should: (a) include all material terms of the deal; (b) make a clear statement of intent to be bound; (c) sign the document; and (d) provide for an exchange of money or other consideration. Why a “binding LOI”? A party believing that it is making a fabulous deal will want to “seal the deal” as early as possible. Any mention of a later agreement should clarify that such agreement is merely to memorialize the terms agreed to in the letter of intent.
Parties not intending to be legally bound by a letter of intent should consider not utilizing same. For example, a seller of a property in great demand may be better off not to risk that its early negotiations become a binding deal with the first party that expresses interest. If abstinence is not a practical option, the risk of the letter having binding effect may be minimized by the following, nonexclusive drafting suggestions:
(i) Entitle the document “Negotiation Proposal,” or something similar, instead of “Letter of Intent”;
(ii) Draft, in bold, a provision containing clear language, indicating that the document is not binding and should not be relied upon as such, and the parties do not intend to create legal obligations unless/until a formal, written purchase agreement (lease or other “final agreement”) is later prepared and executed by the parties;
(iii) Do not provide a signature block (or have signature indicate receipt only, not assent);
(iv) Make sure the proposed terms in the document contain the contingencies that would appear in the formal contract. If the document is held to be binding, but the contingencies do not occur, the result should be that performance obligations are excused due to non-satisfaction of the contingencies.
(ii) Draft, in bold, a provision containing clear language, indicating that the document is not binding and should not be relied upon as such, and the parties do not intend to create legal obligations unless/until a formal, written purchase agreement (lease or other “final agreement”) is later prepared and executed by the parties;
(iii) Do not provide a signature block (or have signature indicate receipt only, not assent);
(iv) Make sure the proposed terms in the document contain the contingencies that would appear in the formal contract. If the document is held to be binding, but the contingencies do not occur, the result should be that performance obligations are excused due to non-satisfaction of the contingencies.
Finally, parties that desire their letters of intent to be no more than agreements to agree re: the substance of the deal, but want to clearly agree on an exclusive negotiation period, or deal with preliminary due diligence and confidentiality matters can easily do so. In such instance, a simple, clear declaration to the effect that: “this LOI is non-binding and subject to a final definitive agreement between the parties hereto, EXCEPT FOR the provisions contained in Section___, which the parties hereto agree shall be binding upon them, from and after the Effective Date …” would be in order.
The simple moral of this story: “Watch your language with Letters of Intent”. If the LOI for your transaction “does not fit” (your intent), you must alter it. Otherwise, it may be worth a lot more than the paper it is written on, especially to an aggrieved party.
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