Law Offices of Ronald D. Jackson

Real Estate

Is a Letter of Intent Enforceable?

It depends on the fine print and of course, the intentions.

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Disclaimer: This is not legal advice.

Letters of intent are often used in business negotiations. You may be asked to sign a letter of intent in connection with a potential business or asset sale, intellectual property transfer, real estate acquisition, or other business deal. Many people assume that a letter of intent is a nonbinding and unenforceable document. However, depending on the circumstances, they may be wrong!

A good thing about a letter of intent is that it can save you time and money. By signing a letter of intent you can learn early in the negotiation process whether you and the other side are likely to agree on the major terms of a deal. The bad thing about a letter of intent is that if you are not careful, you could end up legally binding yourself to a deal that you might later regret.

A letter of intent is general in scope. The contract or purchase agreement, which is negotiated and drafted later, is the legal document that spells out the details. And as the saying goes: The devil is in the details. Until you have a signed contract, you should retain as much flexibility as you can demand. You want the option to walk away from a deal if negotiations go badly. Hence, the contract or purchase agreement should be the only document that legally binds you. Do not get legally bound by a letter of intent (unless that is your objective). Carelessly signing a letter of intent can cause great harm. Doing so can lead to unintentional and perhaps very bad consequences.

Before you sign on the dotted line of a letter of intent:

Look for a disclaimer. Check to see that the letter of intent contains a disclaimer, which clearly indicates that the parties do not intend to be bound by its terms.

Make it clear that only the contract will bind. Make sure the letter of intent provides that only the written contract or purchase agreement to be negotiated and drafted later will bind the parties.

Take care regarding nonsolicitation provisions. Be very careful if the letter of intent contains a nonsolicitation or "nonshop" provision, a common clause that prohibits you and/or the other side from seeking or entering into a letter of intent or purchase agreement with a third party usually within a specified time period. Make sure the intent of any nonsolicitation provision is clear, and that you uphold your end of the bargain.

Take care regarding due diligence provisions. Be very careful if the letter of intent contains a due diligence provision, a common clause that gives one side or both the right to receive and review certain documents about a proposed deal within a specified time period. Make sure the intent of the parties regarding any review provision is clear.

Watch out for good faith bargaining provisions. Does the letter of intent contain a promise by one side or both to negotiate in good faith or to close the deal? The presence of such a requirement will be a key factor in determining the nature and amount of damages you may be liable for (or entitled to) in the event of a breach.

Get legal help!!! Don't treat a letter of intent lightly. The best time a lawyer can help you is before mistakes are made. A so-called "nonbinding" letter of intent can be tricky, because it may not legally mean what many people assume. Whether a letter of intent is an enforceable contract depends on the fine print and the situation.

Where parties intend to be bound by certain provisions of a letter of intent such as nonsolicitation and due diligence provisions, the Oregon Supreme Court has ruled that an enforceable contract as to those provisions will exist. Although the Oregon case involved the enforceability of a "nonshop" provision contained in a letter of intent to enter into a final purchase and sale agreement for real estate, the principles articulated in that case are relevant to other kinds of commercial deals.

The lesson is clear: Under Oregon law, a letter of intent will be an enforceable contract in certain situations. So the next time you're asked "to put your John Hancock" on a letter of intent, be sure you fully understand what it means.

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