by Mert F. Buckley

Law schools used to caution budding lawyers to avoid letters of intent because they sometimes produce unintended results. They aren’t contracts, but courts will sometimes enforce letters of intent as binding agreements, given the right circumstances. With this uncertainty, lawyers were taught to steer clear.

But we have noticed letters of intent becoming commonplace in commercial real estate sales and leases over recent years. They are also commonly used in business acquisitions. We welcome their use. Properly drawn and applied, they help facilitate real estate and business deals.

What Is a Letter of Intent?
It is usually a short document, one or two pages, that sets out the main terms of a “preliminary agreement” between parties, including identification of property, price, closing conditions, length of inspection period, etc. The letter will say “this is not an agreement,” and that it only expresses the preliminary terms the parties have identified to be included in a contract they will sign later. It may also say no agreement exists between the parties until a contract is prepared and signed by them.

Advantages
Time and money. A letter of intent allows the parties to test the waters on big issues. If they can’t agree on price, identification of property, or some other major issue, they’re better off knowing it then instead of spending more time and money negotiating a formal contract that includes minor terms.

Disadvantage
You don’t really have a binding agreement with a letter of intent. By its terms, either party can drop negotiations and deal with someone else. Although this seldom happens, it should still be considered.

Some Precautions
Letters of intent should be carefully worded and clearly state that no agreement exists. And here’s the reason law school instructors don’t like them – a court may still find an agreement exists if the parties start to carry out the terms of the letter before a formal contract is signed. For example, what happens if a prospective buyer takes possession and pays a security deposit? Has the letter of intent now turned into an agreement? Further discussion of this would require another article. The lesson is to go straight to a contract after the letter of intent is signed. Don’t start treating the letter of intent as the “agreement” and still hope to back out if things don’t work out.

(Article appeared in Adams Jones February 2003 Newsletter)