The High Price of Imprecision: An Examination of the Enforcement of Letters of Intent Under California Law


Letters of intent and other similar pre-contractual documents, such as term sheets or memorandums of understanding, are used extensively in California real estate transactions as a means for negotiating parties to demonstrate commitment to the deal at hand and memorialize agreements on key business points early in the process. In most cases, parties do not intend for their letter of intent to constitute a binding contract. Rather, the goal is usually to craft a document that can be used to facilitate and guide the preparation of final, comprehensive contract documents, while leaving he parties free to walk away in the event agreement on final documents cannot be reached. In fact, many letters of intent contain specific language stating that the parties do not intent to be binding.

Under California law, however, such unenforceability is not always certain. Depending on the specific language of the letter of intent and the conduct of the parties before and after its execution, it is possible for a purportedly non-binding letter of intent to morph from simply an agreement to agree, which is unenforceable under California contract law,1 into either a fully binding obligation to carry out the contemplated transaction or an enforceable agreement to negotiate in good faith. Thus, without sufficient care in drafting and in conduct, a party who believes it is creating nothing more than a negotiating tool could find itself obligated under an enforceable agreement.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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