Roscha & Odne LLP has represented numerous builders, developers and landowners in Contra Costa, Solano, Napa, and Alameda counties with respect to the acquisition and development of real property.
Many parties prefer to prepare a letter of intent to be signed by the parties, which sets out the key terms by which the parties would reach final agreement. This can be helpful and less expensive than drafting the entire purchase agreement up front when key terms are still being negotiated, and when the parties are unsure if they will complete the deal with one another.
If you elect to prepare a letter of intent, care must be given to the language used so you do not inadvertently turn what you think is a non-binding statement of intentions into a binding agreement to sell or purchase the property, especially if you want to back out of the deal before the purchase agreement is executed.
We would encourage our clients to add language to their letter of intent to clarify that both parties understand that, except as expressly described in the LOI, it is not a binding agreement, that either party is free to terminate discussions and negotiations at any time (or after a designated time period), and that no party has any obligation to purchase or sell the property until a final definitive agreement has been executed with all key terms still to be negotiated.
Care should also be taken to ensure that the LOI does not create a binding obligation to negotiate the remaining terms in good faith. See Copeland v. Baskin Robbins (2002) 96 Cal.App.4th 1251. If that is the desired course, the LOI would need to include language stating that the terms are merely a summary of terms to be negotiated by the parties, but that neither party is under any obligation to negotiate further terms.
You may wonder why the exception is included related to binding language. There are certain LOI terms that you want to be binding, and those would include obligations to keep the negotiations confidential, any exclusivity period that is agreed upon where the seller is prohibited from negotiating with other parties or marketing the property, and any clause allocating the payment responsibility for costs and fees of the LOI or negotiations.
If you are working on the sale or purchase of commercial real estate, and drafting a purchase agreement or letter of intent, consult an experienced attorney to ensure it is done correctly. Each situation is different, and your LOI should meet your expectations.
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