Business Law - Beware the Letter of Intent

Regardless of whetheryou are acting for a Landlord or a Tenant, inevitably you will be presentedwith a document already signed or to be signed setting out the commercial termsof a lease. 

The document is referredto variously as a ‘letter of intent’, ‘expression of interest’, ‘offer tolease’ or ‘heads of agreement’ and is given to a prospective tenant by theagent before a formal lease document is prepared.

There are a couple ofreasons for this.  Primarily a letter ofintent sets out the significant terms of the agreement.   It is also intended to represent a commitmentby the Tenant and normally marks the timing of the payment of the deposit.  It is generally expected that the termsexpressed in the letter of intent will be reflected in a formal lease preparedusually by the Landlord’s lawyer. However, it is also possible that the document itself may be binding onthe parties and might be able to be enforced as an agreement to lease (i.e. acontract), which can have significant consequences.

Many of our clients havecome to us with a fully signed document capable of enforcement as an agreementto lease, and yet they believe that they aren’t bound by its terms.

The problem is that aCourt won’t be interested in whether you ‘thought’ you were bound or not (i.e.subjective).  A Court will look at thenegotiations to determine objectively whether or not there is a concludedagreement.

The document itselfmight contain a provision that a legally enforceable agreement won’t come in toforce until a lease has been signed by the parties.  That might seem plausible from a Landlord’spoint of view to encourage a Tenant to finalise a lease without delay, but sucha provision can on occasions be a “double-edged sword”.  The Tenant might refuse to sign a lease and aLandlord might wish to rely on the document to compel the Tenant to fulfil itsobligations.  This is particularly sowhere the Landlord might have expended money in anticipation of the Tenantproceeding with the lease.

So, what should you do?

Firstly, you should contact your solicitor. We can help make sure that negotiations are intended to create a binding legal relationship if that is your intention or undertaken on a non-binding basis until you are fully satisfied with the terms of the agreement to lease or lease. Secondly, if it is not intended that a binding legal relationship is created then you should insert words to this effect “This [letter of intent/expression of interest…] is not a binding agreement for lease and neither party shall be legally bound until a formal lease or agreement for lease is executed by all parties (including guarantors if applicable).” A Landlord should also consider whether or not a person intended to be a guarantor should also be a party to the document so that they are bound by it.

Clearly, timing can be an issue.  From both a Landlord or Tenant’s perspectivethe timing and execution of a suitable Letter of Intent can be of criticalimportance.

Sometimes there is legitimatecompetition for properties. 

In any event we recommend that youobtain timely advice prior to signing in order to ensure that negotiationsproceed in the manner you require and the document signed reflects the parties’intentions.

If you need help, call us.

Disclaimer: Reliance on content.
The material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.