Maryland Court Rules Letter of Intent is Binding Even if Parties do not Wish to be Bound
The highest court in Maryland recently found that a letter of intent was binding on the parties even though the parties were unable to agree to the terms of the lease based on the letter of intent.
In Falls Garden Condominium Ass’n Inc. vs. Falls Homeowners Ass’n, Inc. (filed January 27, 2015), two associations were at odds over the use of parking spaces. For years, Falls Garden residents parked their cars in several spaces but then found out the Falls Homeowners Association rather than the Falls Garden Association owned the spaces. The Falls HOA attempted to block Falls Garden residents from using the spaces. The dispute found its way to the courts. As the trial date neared, the parties attempted to settle the dispute and signed a letter of intent containing terms for the lease of the parking spaces and the settlement of the lawsuit. Among other items, the letter of intent provided that Falls Garden would lease from Falls HOA a certain number of parking space for 99 years at $20 per month. Falls Garden would pay the real estate taxes and insurance associated with such spaces and indemnify Falls HOA from any claims arising from the use of the spaces. It also provided that the lease would contain the "usual and customary provisions regarding dates, methods of payment, provisions of default and breach, severability, signs, quiet enjoyment, waiver and the like." Falls HOA then sent a proposed lease to Falls Garden. Falls Garden rejected the lease, claimed the LOI was non-binding, and went back to court to settle the dispute.
However, the trial court, the Court of Special Appeals and the Court of Appeals all found that the letter of intent was enforceable. Falls Garden was bound to the terms stated in the LOI. The lower courts even went so far to hold that Falls Gardens must sign the proposed lease that it had previously rejected.
What is going on here? Most of us in the real estate world have always viewed the LOI as an efficient means to get business terms out on the table and agreed to before negotiating a lease or purchase contract. But, except for a provision to exclusively negotiate a lease or purchase contract with each other, parties usually understand that the LOI is non-binding. Even this court in an earlier case, Cochran v. Norkunas, 919 A.2d 700 (2007), held that an LOI that did not contain the non-binding language was in fact non-binding because the parties did not show an intent to be bound. The Cochran LOI was for the purchase of a residence. Although the business terms were set forth in the LOI, it also provided that the standard form Maryland Realtors contract would be delivered to the seller and two paragraphs in the Cochran LOI contained described certain provisions that would be in or would be deleted from the contract. The Cochran court held that a reasonable person, reading the Cochran LOI would have understood the letter of intent to mean that a formal contract offer was to follow the letter of intent.
But the Falls Garden LOI, similar to Cochran, included a term that the “proposed Lease” would include “the usual and customary provisions regarding dates and methods of payment, provisions for default,” etc. What is the difference then between the Cochran LOI and the Falls Garden LOI?
In essence, the Cochran court found that there were essential contract terms that were not agreed to or mentioned in the LOI, which the parties left to the standard Maryland Realtors contract, while the Falls Garden court found that the LOI set forth all the material terms of a lease and that only non-essential matters that are often included in similar leases were left to be agreed upon at a later date.
Whether or not you agree with the Falls Garden court, if you are preparing or reviewing letters of intent for leases or purchase contracts and your client does not want to be bound, then the LOI must expressly contain non-binding language such as the following (but don’t forget to carve out the binding nature of the exclusive negotiation provision):
Non-Binding. Except for the obligation set forth above in paragraph _____to exclusively negotiate the terms of a purchase agreement, which the parties agree shall be binding, this letter of intent is intended to be a non-binding expression of interest only. It is understood and agreed that until full execution of a purchase agreement, neither party shall be legally bound to the other with respect to the purchase of the Property or the terms set forth in this letter of intent. This letter of intent is not such a purchase agreement.
Ann Marie Mehlert is a real estate attorney at Lerch, Early & Brewer in Bethesda, Maryland who works with real estate developers, investors and owners on all aspects of commercial real estate. For more about letters of intent, contact Ann Marie at (301) 907-2803 or firstname.lastname@example.org and see her article “Letter of Intent is First Tool in Lease Negotiations.”