August 11, 2015

Do We Have a Deal or Don't We?

How do you know when you’ve reached a final, binding agreement for a real estate transaction? Often one party to a lease, purchase agreement, or real estate agreement or covenant believes the parties have reached a final binding agreement while the other does not. How can you ensure you agree only to the terms you intend?

1. Get It in Writing

The presence of writings — a letter of intent or its 21st century equivalent, an email or text — can complicate or simplify the question depending on its wording. Framing a communication about negotiations clearly and in the proper context is critically important. Is a letter of intent the agreement itself? Or, is the communication merely an agreement to enter into a subsequent formal agreement subject to completion of further negotiations?  Don’t be ambiguous when communicating about these questions — particularly when the communication is in writing.

2. Make Your Intent Clear

Court decisions on enforceability of an agreement confirm that it is a good practice to be clear about a writing’s context. Courts look at the definiteness of terms as well as the intention of the parties to be bound by a specific communication as critical evidence in determining whether the communication is enforceable. If a party is clear about whether it intends a writing to be binding (or not), courts will honor that expressed intention. For example, a letter providing that it merely summarized and evidenced negotiations was interpreted by a court in Minnesota as not constituting a binding contract — it was merely an agreement to negotiate in good faith and nothing more. 

3. Avoid Ambiguity

Ambiguity about a party’s intent for a communication can cause confusion and problems. A Colorado court found that there were substantial fact issues, including parol evidence, as to whether an owner’s letter concerning real estate development constituted a binding agreement with a prospective developer. The court determined that the owner’s failure to be clear about its intent justified the developer’s recording of a lis pendens notice and held that the developer’s claim was actionable. Similarly, a court in Indiana recently found that a writing did constitute a binding agreement despite its description as a “letter of intent” because the drafting of a later, more formal agreement was not identified as a “condition precedent” to the consummation of a binding agreement.

In each case, the courts looked closely at the communication’s language and whether it clarified a party’s intention to be or not be bound. Where the context of the communication was made clear, the courts looked no further. Imprecision and ambiguity about the meaning and context of a writing will lead courts to engage in more detailed and unwelcome analysis for the party seeking not to be bound. Make your intent and terms clear in writing, or you may find you are bound to deal terms you didn’t want.    

Legal citations:  Block v. Magura, 949 N.E.2d 1261 (Ind. Ct. App. 2011); James H. Moore & Associates Realty, 892 P.2d 367 (Colo.  App. 1994); Hansen v. Phillips Beverage Co., 487 N.W.2d 925 (Minn. App. 1992).

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