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Committing to a Deal or Just Talking About It? The Letter of Intent Must Be Clear

In the early stages of a major business deal, the parties often sign a “letter of intent” to express their terms in broad strokes, leaving details to be worked out in a definitive, final agreement. The letter is not meant to bind the parties, just set the framework for the negotiation to come. Sometimes, however, without a clear statement of that purpose, a signed letter of intent can be an enforceable contract.

Any letter of intent for a transaction should state explicitly that the parties generally do not intend to be bound to do business with each other until a definitive agreement is signed, and only on the terms of that agreement. Failing such clarity, the letter of intent may become unintentionally enforceable, with potentially disastrous consequences. 

Deciding earlier this year between neighboring homeowners’ associations fighting over ownership and access to a parking lot, the Maryland Court of Appeals found for the party seeking to enforce a letter of intent, though the part of the letter stating lease terms were deemed enforceable at yet. In its decision the high court looked to a restatement of contract theory for a sliding scale of four categories of enforceability of letters of intent.

At one extreme, the parties say they do not intend to be bound until a definitive contract is signed. Shading slightly in the other direction, though not there yet, is the next category in which the letter points to specific issues yet to be negotiated as part of the deal. Letters of intent fitting either of these two categories are considered unenforceable.

In the third category, the parties indicate agreement on all necessary terms but pass over any mention of other relevant but inessential matters that are often included in such contracts. At the other extreme, the fourth category is letters of intent containing express intentions to be bound. Letters of intent falling within either of these last two categories are considered enforceable. 

In the recent case the quarreling homeowners’ associations attempted to settle their lawsuit along lines set forth in a letter of intent between them. The letter described the terms of a settlement agreement, to be drafted and signed later, and of a lease of spaces from one association to the other, also to be drafted and signed later.

The fact that the letter of intent contemplated further agreements to be signed later did not prevent the letter from becoming enforceable. The letter stated the terms of dismissal of the lawsuit, a release by one association of the other from claims of ownership of certain parking spaces, and major terms of a lease. This was enough for the court to fit the letter of intent into the third category of its contract theory analysis, as expressing agreement on all essential terms, though silent on standard but inessential ones. As a result, this aspect of the letter of intent was deemed an enforceable.  

The only exception the court made was for the lease description. Although lease terms were presented in significant detail in the letter of intent, the letter stated that the lease would be subject to “review, comment and execution” by one of the parties, thereby indicating an as yet unsatisfied contingency. Otherwise, the lease, too, might have been enforceable.

In major business transactions, parties often negotiate a letter of intent to determine whether they have a deal at all, establishing agreement on the major issues, even if that is no guarantee against getting bogged down later over the details. The letters typically state that the letter is not binding except for certain provisions, such as confidentiality of information exchanged, a covenant from the seller not to shop the deal to others, and the like. The court’s recent decision, however, points up the need for an explicit statement as to what is binding and what is not in a letter of intent, lest the intention become a requirement.

Here is an example of a statement to include in a letter of intent to ensure that it is a non-binding document:

“This Letter of Intent sets forth some, but not all, of the terms of the proposed transaction described herein. Other material terms remain to be negotiated. Except as explicitly provided otherwise herein, the parties agree that neither of them is legally bound by the provisions of this Letter of Intent unless and until the proposed transaction is reduced to a final document, which each party has executed and delivered to the other.  If and when that occurs, the parties will be bound by the terms of that final executed and delivered document and not by the terms of this Letter of Intent.”

For more information please contact Jay Merwin at 410-583-2400 or merwin@bowie-jensen.com.

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