Be Careful - A Letter of Intent Could Be Binding

Be Careful - A Letter of Intent Could Be Binding

Business people who agreed on the general terms of a transaction 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 β€œyes” – a Letter of Intent isn't a binding contract; it is merely an expression of a plan to negotiate a binding contract. But that's not always true.

Sometimes, having a Letter of Intent is so specific and leaves so little out that it can be legally considered a contract in itself. For instance, in one case involving a real estate sale, the buyer and seller signed a Letter of Intent that included a description of the property, the sale price, the deposit, title requirements, and the time and place of closing. It said the buyer's offer was accepted and that the two sides "shall" sign a sale contract that was satisfactory to both. Before signing the sale contract, though, the seller changed her mind and agreed to sell the property to someone else. The buyer sued and the state court in which this case took place sided in their favor. It said while the Letter of Intent wasn't a formal contract, it was so specific and clear that it accounted to a binding agreement.

If you are signing a Letter of Intent, be very careful if it is 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." 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 specified amount of money as a penalty.