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Letters of Intent: Binding, Nonbinding or a Little of Both?

Letters of intent are widely used by parties to a real estate transaction to outline the key business terms of the transaction, before the parties negotiate a more final, comprehensive agreement that incorporates all of the terms of the transaction.  Most people assume a letter of intent is nonbinding and imposes no obligations on the parties to go forward with the contemplated transaction.  However, a recent Oregon Supreme Court case, Lilian R. Logan v. D. W. Sivers Co., illustrates how a “nonbinding” letter of intent can actually have some terms that are binding and some terms that are not.

In the D.W. Sivers case, the parties entered into a letter of intent which set out the basic terms for the buyer’s purchase of a shopping mall from the seller, including a purchase price of $5.28 million and a specific closing date.  The letter of intent also contained several provisions that are often included in letters of intent to express the nonbinding nature of the document.  This included a provision where the parties acknowledged that “this Letter of Intent proposal is not a binding agreement and...is intended solely to establish the principal terms of the purchase and as a basis for preparation of a binding Purchase and Sale Agreement.”  

The letter of intent also contained a separate non-solicitation provision, whereby the seller agreed he would not solicit any letter of intent or agreement with any other party for the sale of the shopping mall for a 60-day period after the letter of intent was signed.  This had the effect of assuring the buyer that the seller would not sell the shopping mall to another party for at least 60 days.  Importantly, the provision mentioned above expressing the nonbinding nature of the letter of intent included a qualification with regard to this non-solicitation provision.  After expressing the nonbinding nature of the letter, the provision stated “provided, however, in consideration of Purchaser’s good faith efforts to review the due diligence material provided by Seller, Seller agrees...to comply with the Non-Solicitation provision set forth above.”

You can probably guess what happened next.  The seller accepted another offer for the property within the 60-day non-solicitation period, and then refused to negotiate any further with the original buyer.  The original buyer then sued the seller, claiming the seller had breached the non-solicitation provision of the letter of intent. 

In defense, the seller argued that the entire letter of intent was nonbinding (recall the letter stated it was “not a binding agreement”).  At best, according to the seller, the letter was nothing more than a framework for future negotiations, and that it was too indefinite to be an enforceable contract.  The seller also argued that even if the letter of intent was binding, it was only binding for so long as both parties chose to continue to negotiate.  However, the Oregon Supreme Court rejected the seller’s arguments, and held that the non-solicitation provision was enforceable and had been breached by the seller.  The court concluded that, although the letter of intent was not, as a whole, a binding agreement for the sale and purchase of the property, the non-solicitation provision was binding. 

The lesson from this case is that parties to a “nonbinding” letter of intent should not assume that all of the terms of the letter are nonbinding.  Even if there is language stating the letter itself is nonbinding and that no deal exists until a definitive agreement is signed, some terms of the letter may in fact be binding if properly qualified.

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We regularly update clients about changes in real estate law and on industry trends. This includes briefing clients on legislative proposals in the federal tax, housing and other legal areas affecting their businesses. Staying current enables you to anticipate and prevent legal problems as well as capitalize on new developments.
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