Parties to a real estate transaction use a letter of intent to agree on, and describe, the important terms of a real estate transaction. The important terms of a real estate transaction are typically the financial terms and the other contract terms that have a substantial affect on one or both of the parties after or during the transaction. The parties use the the letter of intent as a guide in preparing the real estate purchase and sale contract and other binding documents for the transaction.
When reviewing a letter of intent, the first step is determining whether or not the letter of intent is binding on the parties. Although most letters of intent are non-binding they often contain specific terms and conditions which are binding. A few examples of clauses that are typically binding are the confidentiality, dispute resolution, choice of venue and choice of jurisdiction clauses of the letter of intent. These clauses are enforceable even if the parties do not sign a formal agreement memorializing the proposed transaction. Therefore, it is important to review the entire letter of intent to identify any such binding provisions.
The specific language of the letter of intent is also crucial to ensuring the letter of intent is non-binding. If a a letter of intent includes all of the material terms to the transaction then the letter of intent may be binding on the parties. For example, courts have found that including the warranties and representations of the parties to the transaction in the letter of intent, together with the financial terms, may create a binding contract between the parties.
Another clause that appears in a letter of intent causing the agreement to become binding on the parties is a clause stating the letter of intent is enforceable even if the terms of the subject transaction are not completed in a formal written agreement between the parties. Courts have found that including this type of language in a letter of intent is evidence of the intent to create a binding letter of intent.