There is an old saying, if God had designed a horse by committee, he would have got a camel. Sometimes, too many people get involved in a project and something that should be simple becomes overly complicated. I have often raised this over the years when serving on non-profit boards and the board is asked to review and approve a contract. So many times, a room full of the community’s brightest business leaders and lawyers will scrutinize a simple document, line by line, and suggest changes after the board’s counsel, executive director and chairman, or all 3, have already carefully reviewed and negotiated the entire agreement. An agreement by committee, I always argued, was a camel.

I was reminded again of the agreement by committee recently as I negotiated the purchase of property from a religious organization. In this case, the organization’s board could not decide what it wanted to do. The organization was represented by 3 or 4 highly qualified brokers and a pro-bono attorney (who did not have a real estate background). So, it became obvious that we were dealing with 2 committees in negotiating the contract: 1) the organization’s board, and 2) the broker/attorney advisers.

We had no direct contact with the board. All communication initially went through one of the brokers. But, communication came back from any one of the brokers and the signals were different. It was difficult to know exactly what the seller wanted. Consequently, negotiations eventually broke off. I thought that there was a price gap. My client thought that the disconnect was something else.

A few months later, the original broker asked me to resubmit the last letter of intent we had provided and confirm the purchase price. I did so. The broker then asked me to confirm a few other terms which were specified in the LOI. I finally told him that the LOI was clear, but perhaps we should present a contract and spell out all the terms to clarify. Instead, we had a conference call with all the brokers. This was the first time I was able to speak to all of them. They explained how they were all “volunteering” to help this organization and how they would appreciate my help in getting the deal done. I said that the best way we could get this done would be to move on to a contract and stop talking about a theoretical deal. They agreed and I finally was able to prepare and send a contract.

However, they were silent for a few weeks. I think that they had a few calls, maybe even meetings with my client as the client told me that the board was concerned about having to vacate the property on short notice since closing was tied to approvals. We weren’t exactly sure, but it would be good to actually talk to someone about this as we could easily work it out. But, the brokers needed to talk to the board and come up with a solution. I wasn’t sure who was going to come up with this solution, but if they asked me, I could do it in a second. The brokers’ solution was for all of us to meet at the property. A meeting was scheduled and then re-scheduled 3 times until it was finally cancelled. No reason for the meeting or the cancellation was ever provided. Finally, the broker emailed me to tell me that they were solving a problem and it would involve my client signing some sort of note at closing.

Remember, each person on this broker committee is well respected and highly qualified. But for some reason, they got brain freeze here and missed the obvious solution. Perhaps they got so confused by their client, the board, in trying to address the issue, that they created a camel. Regardless, after all the delay, I offered a simple, short paragraph to the contract, and buyer agreed to enter into a post-closing occupancy agreement allowing the seller to occupy the property for up to 120 days after closing. Suddenly, we had a horse again.

Working with others to prepare a contract absolutely can be done. Two heads are better than one. But, if you try to do it as a committee where no one takes responsibility or the lead, it isn’t going to happen. Nothing against camels, but they have no place in your documents.

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.

Many real estate and lease transactions begin with a letter of intent (LOI). An LOI is supposed to be a non-binding expression of interest between a buyer and seller of real estate or a landlord and tenant.  In a perfect world, the LOI should outline, in as much detail as possible, the salient business terms of the proposed transaction.  These would include the parties, purchase price or rent, closing date or lease term, contingencies, due diligence period, financial accommodations such as tenant improvement and who is responsible for closing and other expenses.  However, LOIs often are bare bones and leave many business points to be negotiated with the final contract or lease.  In these cases, what was the purpose of the LOI in the first place?

Sometimes, clients and brokers ask my input on preparation of LOIs. When they do, I try to make them as detailed as possible to that when I prepare the contract or lease later, I don’t have to re-negotiate.  More often, I am given a signed LOI and asked to prepare the contract or lease or worse, negotiate someone else’s document.  These LOIs regularly have missing or incomplete essential terms or ambiguities.  Therefore, we have issues that will have to be negotiated at the contract stage that the client and perhaps the broker intended to have put to rest with the execution of the LOI.

Another pitfall to LOIs is a negotiating strategy some people like to use. When I include a term in a draft of a document that the other side might not like, a common response is “that wasn’t in the LOI”.  These “strict constructionists” can’t honestly believe that a non-binding LOI acts as list of exclusive terms of the deal.  Similarly, if a client wants to modify or even tweak a term, the obstructionist won’t allow it because “that’s what the LOI says”.  People get too hung up on the 4 corners of the LOI, they ignore the provision that says it is non-binding or they just don’t want to make a deal.  Circumstances change between the LOI stage and the final contract.  The parties have had an opportunity to do a bit more due diligence, to talk with their partners, attorneys, bankers and other experts.  They have a more complete understanding of what needs to go in the final, binding deal.  The LOI is designed only to be a road map.  If one party gets too stuck on every word in the LOI, the deal will not get signed.

LOIs can be valuable tools, but only if they are drafted with the appropriate detail and only if the parties understand that until the contract is signed, nothing is final. If they are used otherwise, they can be costly and an obstruction to completing potentially valuable deals.

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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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