There is a fine but extremely consequential line between intention and commitment when it comes to commercial real estate transactions. All potential acquisitions or dispositions begin with good intentions. However, good intentions are meaningless in a deal until and unless the parties transform their mutual intent into concrete – and enforceable – commitments.
A “letter of intent” sits at the intersection of intention and commitment in many real estate transactions. This document may set forth the broad strokes – or even some details – of a proposed transaction, and by signing it, both parties express their intention to move forward. However, if one party has second thoughts and decides they no longer wish to proceed, can the other party enforce that letter of intent as they would a contract?
While the nuances of the law regarding the contractual status of letters of intent vary from state to state, the general principle is they can be considered binding and enforceable agreements if:
- The parties manifest their intention to be bound by the letter’s terms; and
- The letter includes the agreement’s essential terms.
If a letter of intent lacks one of these two essential elements, a court will likely find the document is merely an unenforceable “agreement to agree” at a later date than a binding contract enforceable today.
Both Parties Must Clearly Express Their Intent To Be Bound
A letter of intent may contain an explicit commitment by both parties that they intend to be bound by its terms and may even include language as rights and remedies if one party decides to walk away. Often, however, letters of intent contain no such express declaration. In such cases, a party seeking to enforce a letter of intent must convince the court that the parties intended to be bound by the letter when they executed it.
When considering whether the parties intended a letter of intent to be a binding and enforceable contract, a judge will analyze the letter’s language – or lack thereof – and the circumstances involved in the letter’s negotiation, drafting, and execution.
Of course, leaving it to a judge to discern the parties’ intent leaves much to chance and could result in a party incurring liability when it believed it was merely memorializing its good faith and aspirational intentions. That is why a letter of intent relating to a commercial real estate transaction should clearly and expressly state whether or not they consider the document to create legally binding obligations.
A Letter of Intent Must Contain the Deal’s Essential Terms To Be Enforceable
A letter of intent that says “Party A agrees to sell its commercial property to Party B and Party B agrees to buy it” may reflect the parties’ commitment to a deal. Still, that alone won’t make the letter an enforceable contract. A court will not enforce a purported contract unless it contains the essential terms of the parties’ agreement. If the what, when, how, and how much of a deal remain open for future negotiation and consideration, there is nothing for a judge to enforce.
If the parties want their letter of intent to create enforceable obligations, it must contain such fundamental terms as:
- The property at issue.
- Purchase price.
- Amount of earnest money deposit and identity of escrow agent.
- Due diligence documents to be provided by the seller to the buyer.
- Financing arrangements.
- Closing date and conditions of closing.
- Condition of property.
- Allocation of closing costs, prorations, and adjustments.
- Form of deed.
- Assignment of leases, if any.
For those considering purchasing or selling commercial property, a letter of intent can serve as a valuable and constructive road map to guide the parties as they move forward. However, unless the parties carefully and clearly draft the letter to reflect their mutual intentions and contain the essential terms of the transaction, it may not be enough to get the deal to its destination.