5 Steps to Keep your Letter of Intent Non-Binding
You own real estate and sign a letter of intent that contains the material deal points for your transaction. At the end of the letter, it clearly states: “Unless a formal agreement is entered into within 30 days of the date of this letter, this letter of intent shall be non-binding and of no further force or effect.” Sounds clear enough. But be careful, you can be bound by a letter of intent, even if it states it is non-binding.
The two primary factors used by courts to determine if a letter of intent is binding are:
- INTENT, as expressed in the letter of intent, and
- ACTIONS, taken after the letter of intent is signed.
Below are five simple steps you can take, and a sample non-binding clause, to help ensure that your letter of intent will remain non-binding.
1. Do not imply the existence of a binding agreement.
Avoid using language that can be interpreted as creating a binding agreement. Language included in a letter of intent such as “agree,” “offer,” “acceptance,” or “offer will be null and void if not accepted by 5:00 p.m. on xx/xx/xxxx” may be interpreted as an agreement by the parties to be bound by terms of the letter of intent. Since a time deadline may motivate a prompt response, consider adding a time deadline that does not imply the existence of a contract, such as “your response is required prior to 5:00 p.m. on xx/xx/xxxx.”
2. Terminate negotiations in your sole and absolute discretion.
Parties realize that letters of intent are not binding. Accordingly, include language in your letter of intent that affirms it is not binding and that negotiations may be terminated at any time by either party in their sole discretion.
3. Do not agree to negotiate in good faith.
Although this may be counterintuitive to the spirit of moving a deal forward, it is never abundantly clear what “good faith” means or how you can inadvertently breach this covenant. Accordingly, it is a good idea not to include “good faith” language in a letter of intent.
4. Confirm that an agreement has not been reached.
While moving a transaction along prior to signing a binding agreement, confirm with each communication that an agreement will not be reached until a definitive written agreement is executed by the parties.
Laws have been enacted that permit written agreements to be executed electronically. Electronic signature services such as DocuSign are now commonly used to execute and deliver documents, but be aware that an email that indicates your agreement can also create a binding contract. So, to avoid the inadvertent creation of a binding contract, be sure reiterate in your emails that an agreement will not be reached until a definitive written agreement is executed by the parties.
5. Have strong non-binding language in your letter of intent.
Whether a letter of intent is interpreted as a binding agreement is a question of the parties’ intent as expressed in the letter of intent and through their actions after the letter of intent is signed.
There is no better way to express your intent than having a strong non-binding clause in your letter of intent.
Here is a sample provision:
This letter, though not binding, is intended to serve as the basis for negotiating a final written agreement which will contain material terms not mentioned in this letter. This letter does not create an exclusive right to negotiate or an obligation to negotiate in good faith. Either party may terminate negotiations at any time in their sole discretion. Partial performance by either party of the terms of this letter, or the efforts by either party to perform due diligence or carry out other acts in contemplation of consummating this transaction, shall not be deemed evidence of intent by either party to be bound by the terms of this letter. The subsequent approval or acknowledgement of an agreement by email, text, or any other electronic communication service shall not be binding upon either party. The parties will not be bound to an agreement unless and until they review, approve, execute and deliver a final and definitive written agreement.
A Letter of Intent is an important first step in most real estate transactions. With little cost or time delay, the parties can use a letter of intent to reach agreement on the primary deal points for a transaction. However, as outlined above, you must proceed with caution to avoid having your letter of intent inadvertently converted into a binding agreement.
If you have any questions or comments, email Rick.