Letters of Intent are often a good place to start negotiations for all types of transactions. I’ve written about this before (see post HERE). They can be very helpful in setting the parties’ expectations and helping to draft the contract.  They work well as checklists for the essential points to be discussed.  However, LOIs should never be considered to be the final contract document, nor should they be considered to be binding on the parties as they do not contain all of the essential terms of the contract.

Most LOIs contain language making it absolutely clear that the LOI is non-binding and is merely an expression or outline of the parties’ interest in entering into a more formal, binding agreement. Until such an agreement is executed, the parties have no formal obligation to each other except perhaps, confidentiality and exclusivity for a specific period of time.

When an LOI gets too specific and a contract is not ever signed, disputes can and do arise. One or both parties might look to the LOI to “enforce” some right or a provision.  But, because the LOI is not binding, there is nothing to enforce.

This situation recently came across my desk. The client signed a LOI to sell the stock of his business nearly 6 months ago.  There were at least 5 occasions in the LOI stating that the LOI was not binding on the parties.  The LOI provided that the parties would “promptly” negotiate and execute a Share Purchase Agreement containing the economic terms in the LOI and regular and customary terms for similar transactions.  It provided that the Share Purchase Agreement would contain a 90 day due diligence period.  And, the LOI stated that if the Buyer “waived Due Diligence” and the Seller thereafter “failed to close,” Seller would reimburse Buyer’s due diligence costs up to $150,000.

Prior to and after the execution of the LOI, the Buyer conducted extensive due diligence on Seller’s company. Negotiations for the SPA began in earnest but were difficult for many reasons.  Both sides felt that the other side changed the business terms.  At the end of about 4 1/2 months, the Buyer agreed to “waive Due Diligence” by amendment to the LOI, yet Seller continued to provide financial records of the company that Buyer requested.  About 2 1/2 weeks later, Buyer broker off negotiations and made demand for reimbursement of its due diligence expenses, the entire $150,000.

Seller retained me to address the due diligence reimbursement issue. What were Seller’s rights?  Seller’s obligation to reimburse the expenses arose under the LOI.  But, the LOI, by its terms was not binding.  Of course, the Buyer could easily argue that this was one of those provisions, like confidentiality, that is binding.  However, Seller’s obligation to reimburse had 2 conditions precedent:  1) Buyer waive Due Diligence and 2) Seller fails to close.

Buyer argued that it had waived due diligence per the 2nd Amendment to LOI. I’m not sure that it did because the parties never entered a contract.  The LOI said that the contract would have a 90-day due diligence period.  Did Buyer waive that provision of the LOI or was it the provisions of the LOI allowing it to conduct due diligence prior to signing the contract?

But, assuming, for argument’s sake, that Buyer did waive due diligence, the 2nd condition precedent was not satisfied. Seller could not have failed to close because Seller had no obligation to close.  There was no binding contract.  No one agreed to anything – not the price, not the terms, not the closing date – nothing.  Therefore, Seller had no obligation to reimburse Buyer.

LOIs can be great. But if you never get to contract, all you have is a piece of paper and no rights.  My client, in this case, looks like it will lose this deal, but it will not have an obligation to pay Buyer.  This is a good result.  The Buyer, who was the more sophisticated party in this transaction and a bit of a bully, blew it.  They should have pushed for the contract ASAP so the due diligence clock would start.  Their strategy, whatever it was, backfired.

Last week, the House of Representatives passed HR 1153, the Mortgage Choice Act. The Act, sponsored by Representatives Bill Huizenga (R-MI), Steve Stivers (R-OH), Mike Doyle (D-PA) and David Joyce (R-OH), passed with a small amount of bi-partisan support and was strongly supported by the NAR.  The Act amends Dodd-Frank and is intended to encourage competition between smaller mortgage lenders and large financial institutions.  If ultimately passed as is by the Senate and signed by the President, the Mortgage Choice Act will in deed open up new choices for home buyers looking for financing.  However, Congress will have not only stripped away another level of consumer protection, it will have missed an opportunity to strengthen existing consumer protection.

The Act would change definitions applicable to the Qualified Mortgage Rule under Dodd-Frank allowing mortgage brokers and title companies affiliated with real estate brokers to compete with large institutions. Under the Qualified Mortgage Rule, fees and points associated with a loan can not exceed 3% of the loan amount.  Under current law, “Affiliated Businesses” must count more fees toward the cap, including fees paid to affiliated title companies (like title premium) and insurance companies, as well as monies held in escrow.  The Act changes this differing treatment allowing more competition.

The Democratic Whip report prior to the vote last week noted that the exclusion of these fees, if enacted, “could result in mortgages that turn out to be beyond the means of the borrower to repay.” However, the report failed to mention the distinction between Affiliated Businesses which the Act addressed, and larger financial institutions, which are not required to include these fees in calculating the 3% threshold.  Herein lies the missed opportunity.  While the Democrats make a good point, most home buyers are still saddled with these fees and costs, which are generally paid to unaffiliated businesses and therefore, not calculated in determining whether the borrower can afford the loan.

If either side had offered an amendment or alternate legislation to require all 3rd party costs be included in making the 3% determination, small lenders and Affiliated Businesses would be on equal footing with large institutions, which was the basis of NAR’s argument in support of the Act AND consumer protection would increase at no additional cost to the government. But this did not happen.  As a result, the Mortgage Choice Act is a failed opportunity.

A client recently completed a 1031 exchange. The replacement property is approximately 27 acres near Tampa.  It will be a little over a year before we are ready to develop this property.  The prior owner had an agricultural exemption on the property which he maintained by giving a farmer grazing rights for his cattle.  Last week, the client asked me to prepare a new Grazing Agreement with the farmer.  “Sure”, I thought.  I was certain I had done one before.

I had to dig way back in my form files, the ones kept on CD, to find one. That got me thinking, where have all the cows gone?  It wasn’t too long ago that here in South Florida there were plenty of cows, horses, goats, sheep, emu, pigs and other livestock grazing in and around our neighborhoods.  I grew up in Hollywood and went to school in Davie.  Davie was (and still claims to be) horse county.  My school was surrounded by, and smelled like cows.

My wife and I raised our kids in Cooper City. There were pastures all around “The Coop”.  Our development was a former pasture.  It was not an uncommon site to see sheriff’s deputies corralling stray cows that had escaped their pasture.  Police cars would corner cows against fences and trees while waiting for the farmer to shepherd the cow home.  These sites were common all over South Florida for many years.  Slowly, the cows and horses moved further west and now, the farms and pastures are few and far between, limited to small, rural communities.  If you miss that life, you need to head north, towards Lake O, to Ocala and to the Panhandle.

Where have the cows gone? Open space has vanished in South Florida and my need to draft grazing agreements has long past.  The big dairy farmers have cashed out – selling their land for development.  The small open fields used for grazing or nurseries or other agricultural uses have been snatched up more recently for more small McMansion communities.  The idea of throwing a couple of cows or goats on your property to claim an agricultural exemption in South Florida is not standard practice anymore.

Is this a bad thing? Yes and no.  We certainly miss the open space.  But, it is hard not embrace the growth and progress and what the community has become and can become.  Cows do add character and I hope that we don’t loss all of our grazing areas.

This past August, my wife decided to take my 96 year old mother in law, Evelyn, to Washington, DC to visit our son. We thought that Evelyn would enjoy seeing where Steven lived and worked.  He works on Capitol Hill as an aide to a Congresswoman.  Steven planned a tour of his office and the Capitol for his grandmother.  All went well.  Evelyn enjoyed everything and was very proud to see Steven at work.  After the tour, they said their goodbyes so that Evelyn could rest up for dinner.  Steven went back to his office.  My wife began to walk Evelyn out of the Rayburn House Office Building when Evenly stumbled and fell.  Paramedics were called and she was transported to the hospital.  The diagnosis was a separated shoulder.

Two nights later my wife and Evelyn came home and we began to worry. What were we going to do now?  Fortunately, Evelyn, upon recovery, made everything easy for us when she told us that she no longer wanted to live alone.  We decided to begin to look for an Assisted Living Facility.

My wife is super organized, but this process is an unknown.  She did her research.  I, however, knew that we first had legal steps to take and I suggested that we retain an elder care attorney to guide us.  My wife and Evelyn agreed and we retained an attorney I know an have worked with.  Everyone was and is very comfortable with him and his staff.  He is great at explaining things in language that my wife can understand.  Evelyn trusts us to carry the ball.  If I have questions, our attorney answers me in the type of attorney shorthand and language I expect.  Unfortunately, my wife doesn’t understand that shorthand.  So, when she had questions about process and I answered her, she did not believe that I was correct.  She heard or understood answers differently than I did and she didn’t factor in my years of legal experience to answer her questions.  It began to dawn on me that the client here was not Evelyn, but my wife.  However, this was our elder care attorney’s problem, not mine.

UNTIL – it came time to sell the condo. Evelyn and my wife wanted to list the condo immediately and the attorney needed to transfer the condo to my wife for planning purposes.  We decided that Evelyn would not move to the ALF until some time in January.  Therefore, I determined that we would not list the condo or retain an agent until January, nor would we transfer the unit to my wife until after the first of the year.  Evelyn, the client, said ok.  My wife asked me why and I explained my reasons, both business and legal.  The elder care attorney concurred.  My wife acquiesced but changed her mind often until the end of the year.  She just wanted to get things done.

I had an agent whom I wanted to sell the condo and whom I knew well and trusted. My wife, not Evelyn, through out the holiday season, made suggestions as to how and when I should contact the agent.

When we met with the agent, Evelyn and my wife were very pleased. The agent sent me all the standard forms, all of which I have reviewed hundreds of times.  I assured my wife all was ok,  yet she remains nervous about the listing.

So far this experience is teaching me that when your mother in law is your client, your spouse is the defacto client. No matter the size of the deal or case, the matter becomes a 24-hour a day concern and you will be 2nd guessed more than any other client  you have ever had.  Maybe this case is more emotional because Evelyn is older and has moved to an ALF and we are dealing with everything in her life; but I don’t think so.  Whenever it’s Mom, hers or mine, there has to be an emotional investment and it becomes a team effort.  Mom isn’t really a client.  She’s just Mom.

Negotiating a deal can be a tricky proposition for an attorney. Every attorney wants to do his/her best job and not only assure that the client is adequately protected, but also to try to get the best deal possible for the client.  As to the former, the attorney is and should be given great latitude.  But ultimately, the client will weigh the risks and make the decision.  If the attorney is doing his/her job properly, legal terms will be thoroughly debated, drafted and re-drafted so that the clients can see a nearly final product and the attorney can say “I did the best I could” and explain how the client is protected and where language could be stronger.  That way, the client can make an educated decision as to whether to proceed.

Business terms are another issue. These are the client’s domain.  The client gives parameters that the attorney should negotiate within.  During negotiations, there comes a point when both sides have to have discussions with their clients about which direction to proceed and whether to alter the parameters or terms.  Sometimes, an attorney forgets this role and speaks and acts as if he is the client.  When this happens, your deal can implode.

I recently worked on a future advance loan for a client. For some reason, the bank did not retain the same attorney to close the future advance loan who closed the original loan 2 years prior.  The original loan was an $8.9 million term loan which we amicably negotiated.  We hammered out all of the terms of the original note, mortgage, guaranties and other loan documents with the bank and the original attorney.  Negotiations were tough but fair, and the bank agreed to many of our requests to change standard bank provisions as well as numerous business terms.

The bank’s new attorney for the relatively small future advance ($425,000) did not have this history and it appeared as if he did not read the original loan documents. Clearly, he was not familiar with them because the first draft of the future advance loan documents did not include any of the terms that had been previously negotiated.  The drafts were very much the bank’s original form documents with the new terms of the future advance filled in.   All of the standard objectionable terms that we had negotiated out in the original loan had been re-imposed.  Special provisions that we had negotiated in, were omitted.  In addition, I was not satisfied with the way the attorney proposed to document the new provisions that the bank required for the future advance.  Frankly, he was not documenting the loan as a future advance and loan modification.  As I began to explain my requests, he summarily rejected them as out of hand without discussing them with his client, the bank.

The deal froze in its tracks. The attorney insisted that he was right because the credit approval made no mention of the revisions we had made to the original loan and therefore, he was supposed to amend and restate the loan documents and re-impose the original language.  I was astonished that he would not discuss this interpretation with his client.

By taking this position, he increased the interest rate of the original loan which was not the deal. The future advance interest rate was about 100 basis points higher than the original loan interest rate.  There was no intent on the bank or my client’s part to increase the rate of the original loan.  In addition, each loan was to have a 5 year prepayment penalty, with the penalty decreasing each year.  By amending and restating the loans, the original loan’s prepayment penalty period restarted.  Again, not intended.  Again, the attorney would not listen.  To me, these weren’t even items to negotiate.

To save the deal, I had to have my client intervene directly with the loan officer. Ultimately, the bank accepted every request that I made except one and that one was modified, I believe to appease the attorney.

I am fine when someone makes a mistake as this attorney obviously did. I’m not ok when they refuse to admit it or refuse to go back to the client to see if they did.  This guy, either through arrogance or ignorance decided it was his place to tell me no to every point that I raised.  What’s worse was that he asked me why I was so hostile about everything going on in the deal!  I flat out had to tell him that he was unprepared and that he refused to ask his client about anything I raised.  You can imagine how that went over.  Let’s just say that 4 weeks after closing he is still trying to find “mistakes” that our office made only to find that he remains unprepared and unfamiliar with the language in his own documents.

Attorneys who try to act as the client by making decisions for them and without being thorough and careful, do so at the risk of the deal for their client.

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    Welcome to Assouline & Berlowe’s Florida Real Estate Law and Investment Blog with news, insights, and commentary for investors, developers, and their advisors.


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