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July 25, 2022

Importance of Written Preliminary Business Terms Through Letters of Intent

By: Harsh Arora, Esq.

A Letter of Intent (LOI) is a formal letter between two or more parties expressing their intentions to form a concrete agreement in the future. These letters usually are not considered binding, instead they are a show of good faith. They are generally used to state each party’s intentions without fully entering into a binding agreement regarding their business arrangement. LOIs are a great way to streamline the issues and clarify the specific points for a proposed business transaction and cover preliminary deal terms.

Even though LOIs have many advantages when negotiating between parties, there are certainly some issues to look out for when drafting a LOI. The important thing to note when drafting a LOI is that certain terms within that LOI may be viewed as binding, such terms might be an exclusivity provision or a requirement that the time is of the essence for certain obligations. [1] In order to determine whether a LOI may be binding, courts under Florida law will examine the surrounding circumstances and the language of the document to ensure it is clear, unambiguous, and not subject to conflicting interference. When contemplating a future written contract, it should be obvious from the language or other surrounding circumstances that other matters, where no definite agreement has been reached, are expected to be included in the writing by the parties. If the parties are continuing negotiations of an essential term in an agreement, there can be no meeting of the minds. [2]

When drafting a LOI, a good way to ensure that one is not bound by those terms in the future is to make sure whatever essential terms that are wanted in the final agreement are left open for future negotiation, as under Florida law that LOI will not be deemed as an enforceable contract. [3] The determination of what an essential term is will depend on the nature and complexity of each business transaction and will be evaluated on a case-by-case basis. Under Florida law, courts apply an objective test in deciding whether an enforceable contract exists and if terms are left open, then there is no enforceable contract.

A good rule of thumb when drafting or negating terms of a LOI would be to include language that states both parties’ intention is that the LOI must not be deemed as a binding agreement and that it reflects  a preliminary understanding for the terms to be agreed to in a definitive agreement to be prepared and entered into by the parties in the future. This should create an understanding that the LOI is intended to be a nonbinding agreement which is entered into by the parties to create a future binding agreement.

Nevertheless, it is important to note that because most LOIs are non-binding that they will also be unenforceable in court, unless as previously stated the court finds some intent from the parties agreeing to be bound under the terms of the LOI.

 

Takeaway

LOIs are a great way to start the negotiation process between the parties so that a definitive agreement can be entered into based on such negotiations, but if not used effectively it can hinder any future business opportunities and may create headaches in court.

Kelley Kronenberg Can Help

Harsh Arora, Esq. is a Partner and Business Unit Leader at Kelley Kronenberg, where he heads the firm’s Business Law Practice Group. Harsh assists owners and high-level executives in resolving disputes and preventing problems that threaten the existence of their businesses.

Clients generally do not have to go through the pain of litigation on the contracts that are drafted by Harsh where all obligations and legal formalities are met. In addition, few lawyers have a blended practice with experience in handling both Business Litigation and Transactions, which provides clients an opportunity to receive  well-rounded preventative counseling. That is one of the many reasons why Harsh can act as an outside General Counsel for smaller to midsized companies and local counsel for larger companies that want a strong foothold in Florida. Harsh is licensed to practice law in Florida and New York. Click here to learn more about Harsh. https://www.kelleykronenberg.com/florida-business-law/

For more information on how Kelley Kronenberg can help you, contact Harsh Arora, Esq. at (800) 436-1424 or harora@kklaw.com.

DISCLAIMER: This article is provided as a courtesy and is intended for the general information of the matters discussed above and should not be relied upon as legal advice. Neither Kelley Kronenberg nor its individual attorneys or staff are responsible for errors, omissions, and/or typographical errors – always seek competent legal counsel.

[1]. Seabreeze Restaurant, Inc. v. Pumgardhen, 639 So.2d 69, 70-71 (Fla. 2nd DCA 1994).

[2]. Midtown Realty, Inc. v. Hussain, 712 So.2d 1249, 1251-52 (Fla. 3rd DCA 1998).

[3]. Miles v. Northwester Mut. Life Ins. Co., 677 F.Supp.2d 1312, 1315 (M.D. Fla. 2