The Letter of Intent:  Binding or Non-Binding?

Many parties that consider entering into a transaction, such as the purchase and sale of a business or parcel of commercial real estate, often first outline the transaction in a letter of intent (LOI).  The LOI can be a useful precursor to a formal definitive agreement, such as an asset purchase agreement, because it sets out the parties’ expectations about the transaction.  An LOI can, however, create unexpected results. Drafted improperly, the LOI can actually create a binding agreement as to some or all provisions even though the parties may intend otherwise.

The main consideration when drafting an LOI is whether it is should be a binding or non-binding, or perhaps both binding and non-binding, contract. Most LOIs contain both binding and non-binding provisions.

Prior to performing due diligence and fully negotiating a deal, either or both parties may be reluctant to being legally bound to a fixed purchase price, specific terms of payment, transaction structure (which may have undesirable tax consequences), or other aspects of the deal.  Therefore, the deal points are often specified as non-binding provisions.

On the other hand, a seller generally wants the buyer to agree in a binding provision to keep confidential any information learned during the due diligence investigation and negotiation.  If the transaction does not close, the seller does not want the buyer, or any other party to whom buyer may disclose the information, to use the information to gain a competitive advantage against the seller. The buyer might want to include a binding “no-shop” provision, which prohibits the seller from seeking or responding to offers or speaking with other prospective suitors while the buyer is spending significant time and money performing its due diligence investigation.  

In summary, the parties must give careful thought to each LOI provision, and whether they intend it to be binding or non-binding.  They must make sure to clearly specify whether each provision is binding or non-binding. Failure to do so could result in unexpected and unwanted liability.  

If you have any questions about the legal aspects of LOIs or any other business transaction, please call attorney Brad K. Saunders on (954) 579-7254 or email him at brad@bkslawoffice.com.

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