Enforceable and Unenforceable Letters of Intent

One of the very first steps in the process of entering into a real estate contract for purchase of commercial property is the preparation and delivery to the seller of a letter of intent (“LOI”).  This is the document that typically sets forth the essential terms of an agreement, such as price, closing date, and contingencies.  However, if parties aren’t careful in the drafting of this letter, it can sometimes become binding leaving no room for negotiation when the actual contract is drafted.  This may not have been the actual intent.

LOI’s are not nonbinding as a matter of course – despite what some may think.  They may actually be enforceable depending on the intent of the parties, as indicated in the LOI or elsewhere.  See Weigel Broadcasting Co. v. TV-49, Inc. 466 F.Supp.2d 1011 (N.D.Ill.2006) citing Interway, Inc. v. Alagna, 85 Ill.App.3d 1094, 407 N.E.2d 615, 41 Ill.Dec. 117 (1st Dist. 1980).  If there is disagreement as to whether an LOI is an actual enforceable contract, Illinois courts have historically looked at the language in the LOI and whether it indicates an intent to be bound to the deal by virtue of the  LOI alone, or whether the expectation is that a more formal contract would be forthcoming for execution.  See, e.g. Leekha v. Wentcher, 224 Ill.App.3d 342, 586 N.E.2d 557, 561, 166 Ill.Dec. 599 (1st Dist. 1991).

To avoid any misunderstanding, the LOI should be clear and specific as to its nonbinding nature – so that no reasonable person could consider the LOI a binding contract in and of itself.  If the parties are clear in the LOI that the LOI is merely a condition precedent to the execution of a more formal agreement, then the Courts will generally agree that it is nonbinding.  See Chicago Investment Corp. v. Dolins, 107 Ill.2d 120, 481 N.E.2d 712, 89 Ill.Dec. 869 (1985).

To be absolutely unequivocal that the LOI is nonbinding, there should be language in the LOI similar to the following: 

The parties hereto acknowledge that this is a letter of intent only, and is not intended to create a binding contract to sell and purchase the real estate.  Neither party may enforce this letter of intent as a contract and neither will be legally bound to anything contained herein until the execution and delivery by both parties of a formal, written real estate purchase agreement that incorporates the terms of this letter and any other provisions mutually agreeable to the parties.

Even with this language – it is possible, if desired by the parties, to make certain terms in the LOI enforceable.  For instance, the potential buyer might want the Seller to agree to negotiate only with him or her for a period of time or during the time the final contract is being prepared.  These sort of terms in the LOI could be enforced since they are precursors to the actual contract.

If you are starting the process of negotiating a commercial contract for purchase or sale, be sure to have an attorney review the LOI before it is signed.  Often this step is overlooked – and it could make all the difference in your ability to negotiate anything moving forward.  Contact an attorney at Lavelle Law to review any LOI you are considering signing before you sign.