Letters of intent are frequently the first step in countless transactions — leases, purchases and sales of properties and businesses, mergers, acquisitions, financing arrangements . . . the list goes on. The parties typically intend that the letter not constitute a binding contract, but rather a step on the path to forming their binding contract. For the sake of efficiency and economy, the parties want to confirm they are on the same page on the fundamental business points before committing time and money to having the lawyers work on the “formal contract”
Sounds simple enough, and it makes sense. But what happens when the parties have signed a letter of intent, which says that it’s not binding or that it’s subject to a more “formal contract”, and one party walks away before the “formal contract” is signed? Not surprisingly, when there’s enough at stake, the jilted party sues, claiming that the letter really was a binding contract, and that the other party has breached. The U.S. Court of Appeals for the Ninth Circuit is the latest court to weigh in on whether a letter of intent in California, although containing expressions of its non-binding nature, is really a binding contract.
In First National Mortgage Co. v. Federal Realty Investment Trust, a developer sent a “Final Proposal” of basic points for a ground lease transaction to the land owner, expressly stating that the proposal was “subject only to approval of the terms and conditions of a formal agreement.” After the land owner signed the Final Proposal, the ensuing negotiations fell through. The land owner then sued the developer, claiming the Final Proposal was a binding and enforceable lease. The developer argued that the letter was merely a proposal, relying on the clear expression that the parties intended that there would need to be a “formal agreement” before they were bound. Much to the developer’s dismay, the jury concluded that the letter was binding, that the developer had breached and that the developer was liable to the land owner for nearly $16 million in damages. The developer appealed, but to no avail. The Ninth Circuit let the jury’s decision stand — there was sufficient ambiguity and conflicting evidence for the jury to conclude that the parties intended to be bound by the developer’s “Final Proposal”.
If you have questions about whether your letter of intent, deal memo, term sheet or proposal might be a binding contract in sheep’s clothing, we are available to help. Contact Mickey Maher or David Vogel at 619.239.3444.