Is it Possible to Enforce a Non-Binding Letter of Intent?
Letters of Intent (LOIs) can be enforced in both real estate and business transactions. This is a surprising fact for most professionals since many of these types of documents have non-binding provisions. Despite that, signed LOIs can in fact be binding in certain situations and sellers especially should take caution before signing those contracts. What is a Letter of Intent? A letter of intent (LOI) declares one party’s intention to do business with the other. The purpose of an LOI is to: LOIs are used to gauge the seller‘s interest and save time. It would not make sense to draft a full purchase and sale agreement for each lead if you are a buyer hunting for deals. So instead, buyers draft a short LOI with the main deal points and present it to the Seller as an outline for a possible deal. A typical LOI will include the main deal points such as: Can a Party Enforce a Non-Binding LOI? Yes. Despite what your agent (or the buyer’s agent) will tell you, LOIs can be enforceable (Source – Mann v. Mueller). This is true even if the letter of intent states that it is ‘non-binding’ on the parties. You likely won’t be able to force a sale just with a letter of intent, but other elements can be enforced: Signed LOI together with the intent of the parties can be enforced in some limited capacities as indicated above. In practical terms, this mostly affects the seller’s ability to negotiate with other parties. To be enforceable, the LOI must meet the requirements of a valid contract. What are the Typical Terms in a LOI? Letters of intent will usually include standard terms: What are the Pros and Cons of Signing a LOI as a Seller? Pros: Cons: Should Sellers Ever Sign a Letter of Intent? As a general rule, we advise sellers to never sign a letter of intent because the negatives are much more consequential than any advantages. None of the advantages listed above require a signature by the seller. A commitment secured by seller’s signature only benefits the buyer. If the buyer will not consider a deal without an LOI, this step might be required to complete the sale. Aggressive buyers can force a seller into exclusive negotiation with the threat of litigation and performance with a signed LOI. Even if such litigation will be fruitless, sellers under duress could face a prospect of choosing between litigation or giving into the buyer’s demands and selling at undesirable terms. It is unlikely that a seller could force a buyer to close with just an executed LOI, but a buyer could force a seller to exclusively negotiate. An exclusive negotiation period with a buyer is essentially an option to purchase. In that case, sellers should be compensated with adequate consideration. Letters of Intent in Real Estate Transactions LOIs are commonly used by buyers to gauge seller’s interest in off-market deals. Once a seller is open to selling, a buyer will present a letter of intent with the major deal points such as the price, term, contingencies, earnest money requirement, and agent’s commission. A well crafted letter of intent in complex commercial transaction or lease can be very beneficial to all parties. Commercial leases are 40 pages or longer, and LOIs can be a quick test to see if there is a basis of agreement between the parties. Letters of Intent in Business Sales LOIs in business sales operate in very similar fashion to real estate LOIs. Some business sales can be more complicated than property sale due to the nature of the business and due diligence required. Buyers might also have to absorb employees, assume loans, and assume existing liabilities of the business. The LOI might or might not address those concerns. Some points to note: Using a Lawyer to Negotiate, Draft, and Enforce LOIs Sellers, buyers, and agents can strategically use a lawyer to push forward a deal to a signed contract, or create leverage by attempting to enforcement of a letter of intent. If a buyer presented you with a letter of intent, an attorney can help you avoid the potential dangers in signing a LOI that you might regret. With proper negotiation, a lawyer can take the bite of any enforceability provision in a letter of intent. Enforcing a letter of intent on a seller is not common practice, and it does not happen often. However, the mere threat of such action against a non-cooperating party (or a seller not negotiating in good faith) can be an effective point of leverage.
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