Bay Area Business and Real Estate Attorney says: Ninth Circuit Court Ruling Impacts Every Business “Proposal”

If you are a real estate investor or businessperson that regularly deals with contracts, especially offers to purchase property or assets, you need to know about a surprising decision handed down by the Ninth Circuit Court of Appeals of California.

In First National Mortgage Company v. Federal Realty Investment Trust (9th Cir. 2011) 631 F.3d 1058, the Court found that a proposal (commonly referred to as a Letter of Intent) was binding and enforceable despite the fact that it said it was a “proposal” and expressly stated that a legal document was to be prepared if the proposal was acceptable, and that it was acceptable conditioned on the approval of the terms and conditions in the legal agreement.   The document was drafted by the parties themselves instead of by their respective lawyers.

The Court based its decision on the fact that crucial language was missing from the proposal that would have made it non-binding.  This decision provides important lessons for every person signing any business contract:

1. It is essential that if you intend the Letter of Intent to be non-binding, you must expressly include unambiguous language in the document that says just that. Equally important, if you intend the document to be binding, you should say so.

2. Many real estate investors and business owners think they will save money by negotiating the terms of a transaction without a Lawyer.  It is not uncommon for clients to come to my office after these preliminary negotiations have gone too far for me to fix a problem.  While a Letter of Intent is a great tool to iron out the terms of a deal before significant drafting occurs, it must be done with the proper language to show that it is only preliminary negotiation and not binding.

Get your lawyer involved as early as possible in the negotiation and certainly before you sign anything, even a Letter of Intent.

The Bay Area Business and Real Estate Attorneys at Brainin Law Office routinely assist clients in negotiating deals in a quick, efficient, and inexpensive way as an initial step leading up to the actual contract. If we can assist you with your transaction, please call us at 650-422-3313.

April 26th, 2011 Posted to Business Operation, Real Estate Contracts | Comments (2)