Hard Lessons on Letters of Intent

By :Pamela Tobin, Esquire

Did you know that letters of intent can be subject to enforcement as a final contract? Under Pennsylvania law, letters of intent are enforceable if they set forth the key terms of the deal, namely the purchase price, description of the property, the names of the buyer and seller and the time for closing. To avoid becoming enforceable, the letter of intent must state with absolute clarity that the parties do not intend for the letter to be binding. If the letter of intent merely provides that it is subject to a final agreement, that might not be sufficient to avoid a later lawsuit seeking to enforce the letter of intent.

This is largely due to a decision issued by the Pennsylvania appellate court in 2010 called Trowbridge v. McCaigue, 992 A.2d 199 (Pa. Super. Ct. 2010). In Trowbridge,the purchaser made an offer to acquire real estate which the sellers accepted by signing the offer. After the sellers sold the property to someone else for a higher price, the buyer brought suit seeking to enforce the accepted offer. Although the trial court dismissed the lawsuit on grounds that the offer was not enforceable, the appellate court reversed, reinstating the complaint and allowing the parties to take discovery.

We represented an owner who encountered a similar problem when he entered into a letter of intent to sell an apartment complex. The letter of intent provided that it was binding for thirty days while the buyer completed his due diligence and thereafter it was subject to a final agreement. The owner decided he wanted to sell the corporation which owned the land, rather than the land, for tax reasons. The parties negotiated past the thirty day period and could not come to a final agreement on a new price. Months after the deal fell through, the buyer brought suit seeking to specifically enforce the original letter of intent. The trial court declined to dismiss the complaint, even though the buyer had not paid a deposit due under the letter of intent. Eventually, we obtained summary judgment for our client on the basis that the buyer breached the letter of intent by not paying the deposit. Although the buyer appealed, the appellate court affirmed. While the lawsuit was pending, however, it placed a cloud on title, preventing the owner from selling or obtaining financing for the property.

To avoid encountering a similar problem, make sure that your letter of intent clearly states that it is non-binding and that any deal is contingent upon the parties’ entering into a fully negotiated and executed final agreement. You should also include specific dates in the letter of intent by which due diligence should be completed, the deposit paid, and the date for closing to avoid the letter of intent being viewed as evergreen.