More and more owners and prospective tenants now sign letters of intent (“LOIs”) before starting actual lease negotiations. Having a well-drafted LOI upfront can greatly reduce the back-end lease preparation and negotiation costs. The LOI serves its function best when its limits are properly understood by the parties. An LOI is primarily useful for setting the ground rules for a lease negotiation and ensuring that a deal actually exists prior to spending a great deal of time and money negotiating the lease document itself. However, using an LOI can also be risky. If the parties are not careful, the LOI may inadvertently force one of them to live with terms it never intended to put into the lease. LOIs also can often promote confusion because they are necessarily incomplete as to the anticipated lease transaction. This incompleteness can create ambiguity.
To avoid these risks, the best strategy when drafting a LOI is to make all of its terms non-binding, such that it functions as a mere term sheet. It is generally in the best interests of both parties to do so. Neither party wants to be held to any agreement until all of the business and legal points have been fully resolved. In addition, a landlord may prefer the LOI to be non-binding in case another prospective tenant comes along who has better credit or more retail experience, while the tenant may want to be free to shop around for other available locations.
In order to make the LOI non-binding, it does not suffice to simply add a clause to it stating that its terms are non-binding. As discussed below, there is still a chance that a court will rule that the LOI is binding if there is evidence that the parties intended it to be binding or conduct contrary to the non-binding language. Therefore, the LOI should explicitly state that (i) there is no intent by either party to be bound, (ii) there will be no binding agreement until the lease itself is signed, (iii) the LOI does not address all of the essential terms of the lease, (iv) neither party has taken or will take any action in reliance on the non-binding LOI, and (v) any agreement between the parties is contingent upon certain other conditions precedent.
However, notwithstanding that, the parties in certain circumstances may want to provide that certain specific LOI terms will be binding. For example, a landlord will not want the proposed lease business terms (such as the rental amount) disclosed to others, and the prospective tenant will not want its financial and other proprietary information provided to third parties. Accordingly, it is not uncommon for an LOI to contain a confidentiality provision that is expressly said to be binding and to survive the termination of negotiations. Such provisions are enforceable in Oregon. See Logan v. D.W. Sivers Co., 343 Or. 339, 169 P.3d 1255 (2007).
That being said, there may be rare situations where the parties will want the LOI to be binding, such as when they want to sign a lease as soon as possible and believe that an LOI with binding terms will help expedite this. If this is the case, the LOI must contain, at a minimum, a clear statement of the terms required by basic contract law to achieve this goal. These terms should, at a bare minimum, include the identification of the parties, a specific description of the premises, the permitted use of the premises, the term of the lease, any work to be done by either party to the premises, and the rent and other charges payable by the tenant. Moreover, because of the Oregon Statute of Frauds, ORS 41.580, the LOI would need to be signed by both parties in order to be binding. See Lost Springs Development, Inc. v. Whiteley, 106 Or. App. 162, 807 P.2d 304 (1991).
However, parties should be aware that, even if the LOI contains explicit non-binding language, there is still a chance that a court might specifically enforce the LOI if, subsequent to its execution, one of the parties expends considerable time and money in reliance on the LOI. For example, in Van v. Fox, 278 Or. 439, 564 P. 2d 695 (1977), certain financiers drafted a letter of intent in which they agreed in essence to develop certain property with a group of developers as a joint venture between the parties. After the letter of intent was executed, the developers expended considerable time and money in starting the development process. A dispute subsequently arose, and the financiers ordered the developers off the property. The developers then brought an action for specific performance of the LOI. The court held that, even though the LOI was rather imprecise in some respects, there was no doubt as to the intention of any of the parties concerning the material elements of their agreement, including the purchase price that the financiers were to pay the developers upon completion of the development. Because of the considerable time and effort expended by the developers in reliance on the LOI, which was greatly emphasized by the court numerous times, the court pointed out that the law recognizes a requirement that, even though the LOI contemplated further negotiations to finalize the imprecise points, those negotiations had to be conducted in good faith by both parties. Since the financiers themselves drafted the LOI, the court rejected the argument that the LOI should not be enforced because it was somewhat incomplete and indefinite, and granted specific performance relief in favor of the developers.
Accordingly, it is important that the parties to an LOI employ precise language in the LOI to protect their interests, that they have a clear understanding of their objectives in using an LOI, and that they avoid conduct subsequent to the execution of the LOI that could defeat those objectives. Failure to do so could result in significant, unanticipated financial liability.
