A Signed Letter of Intent Isn't a Binding Contract

A signed letter of intent (LOI) is often the preliminary step to a commercial lease. The LOI typically requires the sides to keep the deal confidential while outlining the crucial terms of the lease they both ultimately intend to sign. However, while it may feel like a commitment, the LOI is less than ironclad. Parties may still change their mind either on the lease terms or whether they want to sign a lease at all. So, treating an LOI as a binding contract may cause landlords to make business decisions that prove unwise if the tenant decides to walk away, such as turning away a promising prospect.

Owner Ditches Prospective Tenant at the Altar

A fast-growing West Coast sports clothing retailer recently learned this lesson the hard way. The company decided that the new five-story building being constructed on posh Newbury Street would be the perfect location for its Boston store. The company co-president and landlord signed a six-page LOI outlining the basic terms of the prospective lease. They then finalized the lease terms. The retailer signed the final lease and popped the champagne corks—but the landlord pulled out at the last minute.

The retailer insisted that the LOI was a binding contract and asked the court to enforce it. The Massachusetts court disagreed and dismissed the case. “Parties to a preliminary agreement containing all the necessary terms of a contract may be bound even if the preliminary agreement contemplates the execution of a subsequent, more formal or detailed agreement,” the court acknowledged. However, this isn’t the case where the LOI clearly expresses the parties’ intent not to be bound by the preliminary agreement. The LOI in this case included such language. It appeared in bold face just above the signature lines:

Other than the Confidentiality provision stated above, this Letter of Intent does not constitute a binding enforceable agreement between the parties. Rather, it is only an outline of the basic business terms on which Landlord and Tenant are willing to continue their negotiations for the lease of the Premises. Landlord and Tenant each acknowledge that the parties have not set forth in this Letter of Intent, and have not yet agreed upon, all of the essential terms of the transaction, including warranties and representations, conditions precedent and indemnities. Except for the parties' obligations under the “Confidentiality” section above, binding, legal obligations of Landlord and Tenant will only arise upon the execution of a definitive lease agreement containing all essential terms for the transaction.

It’s not that unusual for negotiations to break off at the last moment, the court concluded. “The law recognizes the right of parties to a proposed business transaction ‘to hug before they marry’” [Alo, LLC v. L3 149 Newbury St., LLC, 30 LCR 746, 2022 Mass. LCR LEXIS 115].

Create a Legally Sound LOI

If you’re going to enter into an LOI “hug” with your own prospective tenants, at least ensure that it’s as tight an embrace as possible. Language expressing the intent not to commit, as in the LOI in the Newbury St. case, will obviously have the opposite effect.

Recognizing that the LOI isn’t an “I do” is only the first step. You can also do yourself a world of good by ensuring that it spells out the lease terms clearly and specifically so as to minimize a tenant’s potential wiggle room. For five key things the LOI should address, see “A Signed Letter of Intent Isn’t a Binding Lease,” available to premium subscribers here.