A “mere” Letter of Intent (LOI) may be a binding contract
Dear Clients and Friends,
An LOI is often used to provide a memorandum of understanding for a business transaction – but do note the following:
Business people who have agreed on the general terms of a deal often sign a “letter of intent” that lays out these terms in writing. The idea is to make sure that everyone is on the same page while a formal contract is being drafted.
But what happens if you sign a letter of intent with someone, and then they walk away from the deal? Is that okay?
In general, the answer is yes – a letter of intent isn’t a binding contract; it’s merely an expression of a plan to negotiate a binding contract.
But that’s not always true. Sometimes a letter of intent is so specific and leaves so little out that it can legally be considered a contract in itself.
For instance, in one case involving a sale of real estate, the buyer and seller signed a letter of intent that included a description of the property, the sale price, the deposit and title requirements, and the time and place of closing. It said that the buyer’s offer was accepted, and that the buyer and seller “shall” sign a sale contract that was satisfactory to both sides.
Before signing the sale contract, the seller changed her mind and agreed to sell the property to someone else.
The buyer sued, and the Massachusetts Supreme Court sided with him. It said that while the letter of intent wasn’t a formal contract, it was so specific and clear that it amounted to a binding agreement by the seller.
If you’re signing a letter of intent, you might want to think carefully about the language, if it’s very important to you to (1) preserve your right to back out or (2) make it as difficult as possible for the other side to back out.
Some letters of intent solve this problem with a “withdrawal fee.” That is, they say that the letter isn’t a binding contract, but if one side doesn’t sign a binding contract on the stated terms by a certain date, he or she must pay a certain amount of money as a penalty.
Do let us know if we can be of help on your business activities whether they are before, during or after a contract is entered into.