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Letters of Intent Revisited: 9th Circuit Finds Letter of Intent To Be Binding

I previously wrote in this blog about an Oregon Supreme Court case that held certain terms of a letter of intent for the purchase of a shopping center to be binding on the parties, while other terms in the letter of intent were not binding. See Letters of Intent: Binding, Nonbinding or A Little of Both, posted December 29, 2010. Recently, the 9th Circuit had occasion to review a similar issue involving a letter of intent for a ground lease transaction. In First National Mortgage Company v. Federal Realty Investment Trust, 631 F. 3d 1058 (9th Cir. 2011), the 9th Circuit upheld a jury verdict that found a letter of intent for a ground lease to be a binding contract, even though the letter stated it was subject to the parties signing a formal agreement. The First National case is a reminder to all parties negotiating a purchase and sale, lease or other real estate transaction that unless a letter of intent unambiguously states it is intended to be non-binding, some or all of the terms of the letter could be found to be binding and enforceable.

In the First National case, Federal Realty and First National had in engaged in negotiations that included an exchange of several proposals concerning a ground lease transaction. Each of the proposal letters exchanged between the parties had detailed language stating that they were not binding. Ultimately, the parties signed a one page document titled “Final Proposal,” which included a “put” and a “call” option for a ten-year ground lease. The “Final Proposal” did not, however, include the same detailed language stating it was nonbinding as the earlier proposals. It did state that “the above terms are hereby accepted by the parties subject only to approval of the terms and conditions of a formal agreement.” No formal agreement was ever signed by the parties.

When Federal Realty refused to comply with the terms of the Final Proposal, First National sued for breach of contract. At trial, the jury found that the “Final Proposal” met all the requirements of a contract and was binding and enforceable, notwithstanding the language that the proposal was “subject to” a formal agreement, which never happened. The court awarded First National $15.9 million in damages for lost rent and the loss of its “put” option. On appeal, the 9th Circuit concluded there was substantial evidence to support the jury’s finding of a binding contract, noting that the “Final Proposal” omitted the nonbinding language that was included in the earlier proposals. As a result, First National’s $15.9 million award was upheld.

As I indicated in my earlier blog post, parties negotiating a real estate transaction should not assume that a letter of intent proposed for the transaction is nonbinding. The specific language of the letter will control and may not create the kind of nonbinding result the parties intend. Accordingly, if you want a nonbinding letter of intent that is truly nonbinding, consult with your attorney so the letter is appropriately drafted to accomplish that result.

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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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