In a commercial context, a letter of intent is usually the first step when entering into a commercial lease. They are usually done without a lot of involvement from lawyers and usually just involve the brokers. They should give brief summaries of most essential terms of the lease and to avoid conflicts in the future, they should be drafted as being “non-binding.” That way, the letter of intent can be viewed as a “term sheet.”
To ensure that the letter of intent is in fact non-binding, it should expressly state so. Of course, a court can always find otherwise regardless of the terms of the letter, depending on the actions of the parties. The intent of the parties of the non-binding effect should be clearly stated. So, in sum, the letter of intent should state:
- The parties do not intend for this letter of intent to be binding,
- The parties are not bound by the agreement until a lease is signed,
- The letter of intent does not incorporate all of the essential terms of the lease,
- No party will take action that will somehow create reliance on the letter of intent, and
- Any agreement between the parties is contingent upon other conditions precedent.
Although not in a lease context, in a published decision the Minnesota Court of Appeals addressed the issue of whether a letter of intent could be actionable and binding in Hansen v. Phillips Beverage, 487 N.W.2d 925 (Minn. Ct. App. 1992). In Hansen, a letter of intent was prepared for the sale of Phillips North Dakota. The letter of intent stated,
This Letter of Intent shall not be a binding legal agreement, and neither party shall have any liability to the other until the execution of the definitive purchase agreement. It is understood (1) that this Letter of Intent is intended as, and shall be construed only as, a Letter of Intent summarizing and evidencing the discussions between Seller and Purchasers to the date hereof and not as an offer to purchase the Assets of Seller or an agreement with respect thereto, and (2) that the respective rights and obligations of Seller and Purchasers remain to be defined in the definitive purchase agreement into which this Letter of Intent and all prior discussions shall merge. Upon execution of this Letter of Intent, the parties hereto agree to terminate negotiations with other prospective purchasers of the Assets and work diligently toward finalization of the definitive purchaser agreement.
(Emphasis added). After the letter of intent was created, but before the deal was finalized, the seller of Phillips North Dakota found out one of its largest suppliers did not approve of the buyer as a distributor. The seller then informed the buyer that the sale could therefore not move forward as planned. The buyer sued.
Specifically, the court held,
No contract is formed by the signing of an instrument when one party knows the other does not intend to be bound by the document. No contract exists in this case where the parties have, by their letter of intent, clearly indicated an intent not to be bound. Paragraph IX of the letter is entitled “Non–Binding Offer” and states that the letter “shall not be a binding legal agreement, and neither party shall have any liability to the other until the execution of the definitive purchase agreement.” This letter creates merely an agreement to negotiate in good faith. Under Minnesota law, such an agreement is unenforceable where the agreement evidences nothing more than an intention to negotiate in the future.
Id. at 927. (Internal citations omitted).
As can be seen, the letter of intent in Hansen included clear language regarding the fact that it was intended to be “non-binding.” Therefore, as long as a letter of intent is drafted with the required verbiage regarding the intent of the parties and its non-binding effect, it should not expose the parties to risk of claims of breach of contract or promissory estoppel.