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11 Prob. & Prop. 42 (1997)
Using Letters of Intent in Real Estate Transactions

handle is hein.journals/probpro11 and id is 44 raw text is: By Michael P. Carbone and
Stephen G. Stwora-Hail
Letters of Intent
in Real Estate Transactions

efore a real estate lease or pur-
chase contract is negotiated and
drafted, the parties may sign a letter
of intent (LOI) addressing the pro-
posed transaction. LOIs come in
many shapes and sizes. Usually they
take the form of an ordinary business
letter, memorandum or term sheet,
although any writing that purports to
express the essential terms of a pro-
posed transaction may be an LOI.
Parties generally assume that an
LOI is only a prelude to a transaction
and is not a binding contract. Never-
theless, an LOI can create legal obliga-
tions that the parties may not have
contemplated. Although it did not
involve real estate, many practitioners
will recall the famous case of Texaco
Inc. v. Pennzoil Co., 729 S.W.2d 768
(Tex. Ct. App. 1987). In Pennzoil, the
court found Texaco liable for tortious
interference with a memorandum
of agreement concerning Pennzoil's
acquisition of Getty Oil Company and
upheld a $10.53 billion verdict. The
court cited a press release announcing
an agreement in principle as imply-
ing a present agreement. Similarly,
in Seaman's Direct Buying Service, Inc.
v. Standard Oil Company, 686 P.2d
1158 (Cal. 1984), overruled on other
grounds by Freeman & Mills, Inc. v.
Belcher Oil Co., 900 P.2d 669 (Cal. 1995),
the court found an LOI to be a binding
contract. There, a party had stated that
a deal was made and remarked that
the parties should save as souvenirs
the pens they used to sign.

In the past, parties often initiated
acquisition and lease negotiations
with a very short form LOI that only
memorialized the most essential terms
of the deal-the parties, premises and
purchase price or rent and term. Now,
particularly in large transactions, par-
ties tend to use an LOT of considerable
detail. If the LOT starts to look more
like a contract, the risk increases that
a court may find that it is a contract.
Why Risk It?
Given the risks and ambiguities
associated with an LOI, why bother to
use one? In fact, there may be good
reasons to use an LOT. For example,
parties may use a nonbinding LOT:
a to induce an owner not to lease
property to another prospective tenant
or sell it to another prospective buyer;
* to satisfy a lender's requirement
for preleasing property as a condition
to funding a construction loan or a
requirement that the purchaser have
some interest in the property before
the lender gives a loan commitment;
* to preserve the parties' common
understanding of what they have
negotiated before they spend further
time and money; or
* to identify and negotiate busi-
ness terms as opposed to legal terms.
Like it or not, the LOI has become
an integral part of buying and leasing
property. The real estate lawyer must
be prepared to deal with it and under-
stand its consequences. Indeed, the

proper use of an LOI can make the
negotiation a more orderly process.
A well-drafted and negotiated LOT
can serve as a blueprint for the pur-
chase contract or lease and can save
much of the time and effort lawyers
waste when they try to draft docu-
ments before the parties have agreed
on all business points. A sample LO
for a retail lease appears at the end
of this article.
Will the LOI Be Binding?
The two most frequently raised
questions about an LOI are whether
it will be binding and what it should
include. These questions are closely
related. An LOT can be a legally
binding contract; the more the LOI
includes, the more likely it will be
binding. For example, a contract to
lease is a written agreement in which
both parties obligate themselves to
enter into a lease at a future time.
Tenants sometimes use the contract
to lease if they want to tie up the
property. Often the contract consists
of an LOT with a printed form lease
attached. In that case, the parties
intend to use the printed form either
as is or as a basis for negotiations.
Unless the parties intend to negotiate
further on the terms of the lease, a
court may assume that they intended
to enter into a standard lease (what-
ever that may mean), and the court
may enforce the LOI as a contract
to lease. See generally Milton R.

Probate & Property

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