Letter of intent: is it legally binding

Service page: Commercial contracts lawyer: drafting, review and enforcement.

You signed a letter of intent, and a deal that looked closed fell through. Now the other party is threatening to sue. But wait: an LOI that says “non-binding” cannot bind you, right? Not necessarily.

What is a letter of intent?

A letter of intent (LOI, or term sheet) is a document that sums up the main points of a deal before a full contract is drafted. It is common in real estate deals, company acquisitions, investment agreements and joint ventures.

The problem: most people think an LOI is a “summary of principles” that you can back out of at any moment. In Israel this is not always true, and that misunderstanding is costly.

What binds and what does not: the distinction worth knowing

An LOI can contain two types of provisions: binding and non-binding. The provisions that are customarily made binding even in an LOI defined as “non-binding” include: confidentiality and non-disclosure of information, exclusivity in negotiations (no-shop), sharing the costs of due diligence, and jurisdiction.

The provisions that are usually not binding: the price, the legal structure, and the parties’ representations about the asset.

Can you withdraw from a letter of intent without paying damages?

Section 12 of the Contracts (General Part) Law, 5733-1973 requires negotiations to be conducted in an acceptable manner and in good faith, and anyone who did not do so is liable for damages (section 12(b)): damages for the harm caused to the other party as a result of the negotiations or of making the contract, to which sections 10, 13 and 14 of the Contracts (Remedies for Breach of Contract) Law, 5731-1970 apply with the necessary changes; those sections deal with foreseeability of the damage, non-pecuniary damage and mitigation of damage. Even when an LOI is not binding as a contract, a party that conducts advanced negotiations and evades them without a relevant reason may be liable for damages: in CA 6370/00 Kal Binyan Ltd. v. A.R.M. Ra’anana Construction and Rental Ltd. it was held that the duty applies even when no binding contract was made.

What this means in practice: did you sign an LOI? You are bound to conduct serious negotiations. Do not surprise the other party with completely new demands, and do not walk away from the table without an explanation.

What to check before you sign a letter of intent

• Exclusivity (no-shop / exclusivity): check whether there is a clause that prevents you from approaching other bidders. The exclusivity period should be reasonable: 30–90 days in real estate and M&A deals.
• Due diligence costs: make sure it is clear who pays if the deal fails. Without a written agreement, it will end in an argument.
• A list of binding and non-binding provisions: include an express clause that defines what binds and what does not, including a specific list in the body of the document.

An LOI in real estate deals compared with M&A

In real estate, an LOI (a memorandum of understanding, zikhron dvarim) is especially problematic. A signed memorandum that contains the essential details of the deal may be regarded as a binding contract even without a detailed contract, and since an undertaking to make a transaction in land requires a written document (section 8 of the Land Law, 5729-1969), the signed document is sometimes what fulfills that requirement. In M&A deals, a detailed LOI (term sheet) with all the economics may be regarded as a “framework contract” that can create liability.