BEWARE THE LETTER OF INTENT
Regardless of whether you are acting for a Landlord or a Tenant, inevitably you will be presented with a document already signed or to be signed setting out the commercial terms of a lease.
The document is referred to variously as a ‘letter of intent’, ‘expression of interest’, ‘offer to lease’ or ‘heads of agreement’ and is given to a prospective tenant 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 Tenant and normally marks the timing of the payment of the deposit. It is generally expected that the terms expressed in the letter of intent will be reflected in a formal lease prepared usually by the Landlord’s lawyer. However, it is also possible that the document itself may be binding on the parties and might be able to be enforced as an agreement to lease (i.e. a contract), which can have significant consequences.
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 by its terms.
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.
The document itself might contain a provision that a legally enforceable agreement won’t come in to force until a lease has been signed by the parties. That might seem plausible from a Landlord’s point of view to encourage a Tenant to finalise a lease without delay, but such a provision can on occasions be a “double-edged sword”. The Tenant might refuse to sign a lease and a Landlord might wish to rely on the document to compel the Tenant to fulfil its obligations. This is particularly so where the Landlord might have expended money in anticipation of the Tenant proceeding with the lease.
So, what should you do?
Firstly, you should contact your solicitor. We can help make sure that negotiations are intended to create a binding legal relationship if that is your intention or undertaken on a non-binding basis until you are fully satisfied with the terms of the agreement to lease or lease. Secondly, if it is not intended that a binding legal relationship is created then 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).” A Landlord should also consider whether or not a person intended to be a guarantor should also be a party to the document so that they are bound by it.
Clearly, timing can be an issue. From both a Landlord or Tenant’s perspective the timing and execution of a suitable Letter of Intent can be of critical importance.
Sometimes there is legitimate competition for properties.
In any event we recommend that you obtain timely advice prior to signing in order to ensure that negotiations proceed in the manner you require and the document signed reflects the parties’ intentions.
If you need help, call us.