Is a Letter of Intent Binding?
A Letter of Intent is often used to facilitate a real estate purchase or lease transaction, a joint venture agreement or other business arrangement. Because those transactions can be very complex, the parties may use a Letter of Intent (“LOI”) or a Memorandum of Understanding (“MOU”) as a means of negotiating the key terms and conditions of the proposed transaction in order to avoid misunderstanding and determine whether they expect to reach agreement to proceed with the transaction.
For example, if an LOI is used for a real estate purchase, the parties will try to reach agreement as to price and other key terms such as the duration of the due diligence period and when the closing will occur. If the LOI is used for a joint venture or other business arrangement, the parties may set out the capital and/or sweat equity contributions to be made by each party, the structure of the arrangement, how key decisions are made or voted upon and how the arrangement will unwind upon completion of the business objective or in the event of a dispute. The LOI for a real estate transaction or business arrangement may also include provisions to preserve the confidentiality of sensitive information provided for due diligence purposes or non-disclosure to third parties of the terms of the transaction.
So, once the parties have reached agreement as to the “big picture” and all have signed the LOI, do you have a deal? Can you hold each party to the terms of that agreement? Generally, no, except that you may have recourse if the confidentiality or non-disclosure provisions are abused. Typically, the LOI is not intended to be binding and may actually state so in the document, but the confidentiality and non-disclosure provisions are typically intended to be binding regardless of whether the transaction proceeds. An LOI will frequently indicate that the parties agree to participate in good faith or use their best efforts to proceed to the transaction documents based on the terms provided for in LOI, but there is still the possibility that negotiation may break down with the parties unable to reach agreement.
So, why should you use an LOI if it is not binding? It is often less time consuming and costly with large or complicated transactions to identify those potential issues or stumbling blocks (the “deal breakers”) before negotiating on the finer points and details in a real estate contract or joint venture agreement. Instead, it is better to find out earlier in the process that you are unlikely to be able to reach an agreement to proceed with the proposed. In addition, a well-written LOI can often serve as a template or starting point for drafting the contract.
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The information contained herein is intended to be general in nature and is not meant to be relied upon as legal or tax advice. You should consult your legal or tax advisor for information specific to your circumstances.