A recent decision by the Pennsylvania Superior Court has lenders concerned that the common practice of exchanging  term sheets with  potential borrowers could saddle  them with unintended contractual obligations. In County Line/New Britain Realty, LP v. Harleysville National Bank and Trust Company, the Superior Court affirmed a trial court ruling that a lender’s term sheet constituted an enforceable contract.

Although lenders are wise to take note of County Line, the case’s practical consequences are not as significant as first impression suggests. This is because the circumstances in County Line that led to the unfavorable outcome for lenders are easily avoided by prudent lenders. With proper precautions, lenders may continue to use term sheets in their negotiations with borrowers.  

The facts of County Line are straightforward. County Line was a real estate partnership formed for the purpose of developing seven contiguous parcels of land. County Line entered into purchase agreements for those parcels, with closing required by early July 2009. In March 2009, County Line approached Harleysville—a bank that previously had handled transactions for County Line’s principals—for a $12,450,000 loan. After a series of negotiations, and with knowledge of County Line’s pressing deadline, Harleysville’s Senior Loan Committee approved a $12,290,000 loan on April 20, 2009.  

Harleysville set forth its proposed terms in a document stating detailed terms of the loan, including: “(1) the identity of the borrower and lender; (2) the loan and facility type; (3) the principal amount, purpose, and distribution of the loan; (4) the interest rates; (5) the term of the loan; (6) the manner of repayment of the loan (amortization); (7) the collateral for the loan; (8) the penalty and fees for the loan . . . ; and [(9)] the guarantors.”  Harleysville representatives referred to the document as a “term sheet” in correspondence with County Line; however, the document was not labeled as such and contained no language limiting its use as an instrument of negotiation, rather than a formal offer.  

In finding that Harleysville’s term sheet was an enforceable contract, the Superior Court stressed that the document contained the “essential terms” of the deal and that it had been approved by Harleysville’s Senior Loan Committee. According to the court, the facts of the case demonstrated that both parties had a mutual understanding and  intent to be bound by the “carefully expressed terms” in the document.  

County Line signals an important warning for lenders. In all correspondence with borrowers, and particularly in legal documents such as term sheets, lenders should make the intention of their communications explicitly clear. Courts will judge whether an agreement has legal force based upon the reasonable understanding of the parties, as deducible from the facts and circumstances surrounding the transaction. If a lender’s term sheet contains no disclaimer that it does not constitute a binding offer, then that lender risks that a borrower (and a court) may interpret the term sheet as a formal contract.

At Obermayer, we recommend that lenders’ term sheets include explicit language, in an obvious place, with distinct formatting stating that the document is NOT a contract. For example:

• As a title: “Term Sheet
• In the header: “For Discussion Purposes Only.”
• In the footer: “This Term Sheet is for discussion purposes only and does not constitute in whole or in part a promise or commitment to lend by [Lender’s Name].”  

With these precautions, a court would not likely hold a lender accountable for the conditions in a term sheet. However, even after taking these steps, lenders should recall that courts will consider all circumstances of a transaction in determining whether a contract exists—including timing of the deal, senior management approvals and the level of detail in pre-negotiation correspondence. Thus, as lenders negotiate, they should always bear in mind the potential for misunderstanding. When in doubt, lenders should consult with legal counsel to ensure that their behavior does not put them at risk.