Letters of Intent – A Trap for the Unwary
Business owners like letters of intent (LOIs) because they offer confirmation that the parties are serious about a proposed deal. Experienced business lawyers distrust them because they often contain traps for the unwary and may lead to disastrous consequences. Even if a letter of intent says it is not a final and enforceable agreement, it may be enforceable in its terms, leaving a party obligated to move forward on terms they never intended.
SO, WHAT IS A LETTER OF INTENT?
A letter of intent is often represented by a seller of property or a business as a nonbinding document that outlines a tentative agreement between the seller and a buyer. In many instances, the LOI will state that it is not a contract, and the buyer thinks they still can walk away from the transaction. This can be misleading or outright false.
Many LOIs are written such that the entire document may not be binding, but significant portions are. For example, terms set out in a well-written LOI may be legally enforceable. Unwary buyers who do not realize the legal weight of the LOI might sign one before finishing their due diligence and find themselves locked into a financially disastrous deal.
WHAT ELEMENTS ARE TYPICALLY INCLUDED IN A LOI?
Confidentiality agreements, due diligence agreements, and terms regarding transaction costs are standard in most LOIs and are usually binding. A typical LOI will include a basic transaction description, payment terms, and warranties. Often, closing provisions and indemnification clauses are included.
LOIs often have a “standstill” or “no shop” provision, establishing that the seller and buyer are in talks exclusively with one another. Another common feature of an LOI is a covenant to act in good faith, which can be a horrible trap for the unsuspecting buyer. A covenant to act in good faith in a skillfully written LOI may obligate the buyer to follow through with the tentative deal and deny the buyer the right to walk away from a bad purchase. Courts commonly interpret phrases such as “good faith” as an agreement to complete an agreement. Other phrases to watch out for include “best effort” and “every reasonable effort.”
No matter how carefully buyers scrutinize the elements of an LOI, some courts have interpreted them as giving the buyer an ironclad duty to bargain in good faith and have found buyers liable for reliance costs when a definitive agreement was not reached.
For more information about business litigation strategies, see our website at www.dontbelunch.com or call Chris Vickers1 at 817-778-9138.
1 Chris Vickers is the author of this article and is responsible for its content. Chris is a Fellow of the State Bar Foundation, for which admission is limited to one-third of one percent of Texas attorneys annually; a member of the Multi-Million Dollar Advocates Forum - limited to attorneys who have won a multi-million dollar jury verdict; was named a “Top Attorney” in Business law by a vote of peers as published by DFW 360 Magazine in Jul. 2020 and Jul. 2022; and named a “Top Attorney” in business/commercial law by a vote of peers as published by Ft. Worth Magazine, Dec. 2015.
Chris Vickers -Member – Multi-Million Dollar Advocates Forum - limited to attorneys who have won a multi-million-dollar jury verdict.
Chris Vickers was named a “Top Attorney” in Business law by a vote of peers as published by DFW 360 Magazine in Jul. 2020 and Jul. 2022.
Chris Vickers was named a “Top Attorney” in business/commercial law by a vote of peers as published by Ft. Worth Magazine, Dec. 2015.
Robert Stanulis was named a “Top Attorney” in Business law by a vote of peers as published by DFW 360 Magazine in Jul. 2022.
