Normally a document referred to variously as a ‘ letter of intent ’, ‘ expression of interest ’, ‘ offer to lease ’, or ‘ heads of agreement ’ is given to a lessee by the agent before a formal lease document is prepared. There are a couple of reasons for this. Primarily a letter of intent sets out the significant terms of the agreement. It is also intended to represent a commitment by the lessee and normally marks the timing of the payment of the deposit. It is generally expected that the terms expressed in the letter of intent won’t change once a formal lease is drawn up. However, it is also possible that the document is binding on the parties and can be enforced as an agreement to lease (i.e. a contract), which can have drastic consequences.
When (or if) two parties become bound to a contract can be one of the most hotly contested issues. In a leasing context, whether a letter of intent is capable of forming an agreement to lease is a fundamental issue that most business people don’t fully appreciate without proper legal advice.
Many of our clients have come to us with a fully signed document capable of enforcement as an agreement to lease, and yet they believe that they aren’t bound.
The problem is that a Court won’t be interested in whether you ‘thought’ you were bound or not (i.e. subjective). A Court will look at the negotiations to determine objectively whether or not there is a concluded agreement.
So what should you do?
Firstly, you should contact your solicitor. We can help make sure that negotiations are undertaken on a non-binding basis until you are fully satisfied with the terms of the agreement to lease.
Secondly, you should insert words to this effect “This [letter of intent/expression of interest…] is not a binding agreement for lease and neither party shall be legally bound until a formal lease or agreement for lease is executed by all parties (including guarantors if applicable).”
Clearly timing is an issue. Real estate agents will try everything that they can to instil a sense of urgency. Sometimes there is legitimate competition for properties. In any event we excel at providing timely advice and documentation in order to ensure that negotiations proceed at the proper pace. If you need help, call us.