In commercial real estate transactions, whether it’s a purchase or lease, letters of intent are ubiquitous.
They appear absolutely harmless. After all, they are nonbinding and only a “tool” for future negotiation, right?
In fact, most letters of intent go out of the way to explicitly state that “it shall not be construed in any way to be legally binding” or that “your signature below merely means you are agreeing to this invitation to negotiate.”
Be careful about accepting this ostensibly harmless “invitation.”
While a letter of intent is certainly a preferred tool for commercial brokers and agents because of its convenience and ease of use, the principle risk is inadvertently creating an enforceable contract under the theories of waiver or promissory estoppel. This may occur because of imprecise drafting or the subsequent conduct of the parties reasonably taken in reliance thereon.
Furthermore, entering into a letter of intent may create a duty to negotiate in good faith and deal fairly. Although this may seem like a good thing, it also may foster future disagreements about one’s “duty” to act in good faith. For instance, what if another buyer or tenant appears with a better offer?
Although the basic deal points of a real estate transaction are usually negotiated by the principals involved, letters of intent must be carefully drafted and scrutinized to avoid unintended consequences.
The last thing you want is to get dragged into court over what you thought was a warm and fuzzy nonbinding letter or invitation to negotiate.
— Travis Logue is a partner at Rogers, Sheffield & Campbell LLP, a Santa Barbara law firm. Click here to read previous columns. The opinions expressed are his own. This article is not intended to provide legal advice. For legal advice on any of the information in this post, click here for the form or phone number on the Rogers, Sheffield & Campbell Contact Us page.