by: Attorney Jeffrey S. Ammon, Miller Johnson
Letters of intent, although common in real estate transactions, are dangerous. In Michigan, courts have ruled that a letter of intent (LOI) can be binding even though it says things like “non-binding”, “only preliminary to a definitive agreement”, and the like.
Courts reach such surprising results most often where 1) the LOI contains a detailed list of many of the deal terms, and 2) both parties have signed the LOI.
Why is the LOI sender asking the recipient to sign if the LOI is supposed to be nonbinding? If you receive an LOI asking for your signature, consider responding this way:
“Thanks for your letter dated _________. We did receive it, but we will not be signing it because we have no agreement with you at this time. We look forward to continuing negotiations with you.”
If you can’t resist sending some status report to the other side, put only a few of the significant deal terms onto a “term sheet”. And do not ask the other side to sign it.
Sure, sometimes you want an agreement with the other side, typically on such things as confidentiality and exclusivity of negotiations for a fixed time period. So put those two subjects into a separate letter that the receiving party signs. But say nothing about the deal terms.
In summary, the traditional approach to letters of intent creates a significant potential for surprise. Work with your legal counsel to abandon this dangerous, traditional approach in favor of one that is easier, more direct, and safer.