When Letters of Intent are Involved in Litigation

Letter-of-intentA letter of intent (LOI) is a document which states proposed terms for a final contract.  Depending upon what is written, an LOI may be categorized as “binding” or “non-binding.”  This is often the threshold issue in litigation concerning letters of intent – whether or not the LOI may be considered to be a binding contract.

Frequently purchase/sale negotiations are founded upon a letter of intent.  For purposes of this blog post, I am focusing on LOIs as they relate to real estate transactions.

Why Details of Letters of Intent are Crucial

Even if non-binding, it may be difficult to vary the terms set forth in an LOI; accordingly, it is important to deal with all items of significance in the letter of intent. Failure to set forth important details can lead to difficulties later, for the following reasons:

  • The parties’ negotiating leverage will be reduced if key provisions such as purchase price, deposit amount, due diligence period, land development approvals, and other items of significance are not included in the letter of intent.
  • Misunderstandings and negotiations can be minimized, along with associated costs.

Binding or Non-Binding

 Typically, the parties involved do not intend LOIs to be binding, but they may still be interpreted as such.

  • Binding Contract.  In the absence of specific language, the courts may look to various factors, including the terms of the letter, the context of negotiations, and partial performance, to determine whether a letter of intent is binding.  A party who breaches such a binding agreement may be subject to specific performance or damages.
  • Obligation to Negotiate in Good Faith.  Where a letter of intent contains such language as “make every reasonable effort to agree,” or an agreement to “negotiate only with the other party,” the courts may impose an obligation to negotiate, even if the letter states that it is “non-binding” or subject to a formal agreement.  Even if this standard does not lead to a finding that a final contract has been created, it may be held to bar a party from abandoning negotiations, or insisting on conditions that do not conform to the terms of the LOI.

Value in Different Degrees of Binding in Letters of Intent

As discussed above, there isn’t always a clear-cut standard to determine whether a letter of intent is binding or non-binding, but there are ways to express the intentions of the parties as one or the other.

  • A letter of intent may have legitimate, binding aspects to it, even though ultimate liability may be conditioned upon execution of formal documents.  For example, a statement that the property will be kept off the market during negotiations for a specified time period, and that the seller will not negotiate with another party during the same period, may serve both parties’ objectives.
  • In order to preserve the intention that a letter of intent not be binding, the letter should not only provide as such, but should further provide that it imposes no legal obligation to continue negotiations to reach agreement.  Alternatively the letter might provide that the parties are obligated to negotiate in good faith and the like, but that if no formal agreement is reached within a prescribed period of time, either party may terminate. Termination must be “without liability” of either party.
  • If it is intended that the letter be fully binding, it might provide that if the negotiations break down, a written position statement must be prepared by each side, which is then subject to arbitration using an identified standard agreement of sale form as guidance.  Although elementary from a legal perspective, it is important to remember that a document will not be enforced if it omits an essential part of the bargain.  Thus, if an LOI is to be enforceable, it should highlight all of the basic terms.

As negotiations for real estate transactions may be extended and costly, a letter of intent can serve as a useful tool to ensure everyone is on the same page. To review the structure of your LOI and avoid future headache, consult an attorney who specializes in business transactions.

Note:  The information above is general; we recommend that you consult with an attorney regarding your specific circumstances.  The content contained herein is not meant to be considered as legal advice or as a substitute for legal representation.

Tax Deadline is Approaching. Are Separated Couples Filing Jointly or Individually?

April 1, 2015By Mary Cushing Doherty, Esq.  TaxesIn late March/early April, many divorcing couples have to make an important decision about filing their income taxes.
  •  In Pennsylvania, divorcing couples sometimes state their filing status as “single” because their accountant said they can file separately.  However, that’s not an option.  The parties may either file “jointly” or “married filing separately.”  In some states, there is a decree of separation, and the IRS will allow those legally separated to file separately.  Pennsylvania law does not provide for legal separation.
  • One cannot assume that there will be benefits to filing jointly rather than filing separately.  The best way to determine this is to have an accountant familiar with both husband’s and wife’s income to run an analysis as to the tax liability when filing jointly compared to separately.
  • Parties who have filed jointly in the past, but want to file separately pending the divorce, will have to allocate or divide shared deductions, joint interest and joint dividends.  The biggest deduction is likely the mortgage interest deduction.  Was that paid from a joint account?  Who signed the checks?  Does one spouse assume the right to take the deduction alone, thereby skewing the tax liability of the other?  These questions must be addressed with one’s attorney and accountant.
  • The custodial parent of minor children may qualify as Head of Household.  The key considerations is whether the parties were separated before July 1.  In other words, the Head of Household must have been separated and primary custodian of the child for over 6 months of the tax year.  The parties must properly take the dependency deduction for minor children.  The other parent – the one who cannot claim as Head of Household – will be filing in the highest tax bracket:  married filing separately.
  • Can the parties file one way and amend to an alternate status at some time in the future?  Yes, but that option only goes one way.  You can file separately and thereafter amend to file jointly within three years of the original tax filing due date.
  • Couples may agree to file jointly to save taxes, but in doing so, they should also consider having an Indemnification Agreement.  Such Agreement will be a private contract between Husband and Wife in the event there is a problem with the joint return, (i.e. error with income reported, taxes due, refund due, etc.)  That private Indemnification will not preclude the IRS from pursuing both spouses.  Even if the IRS finds that more taxes are due and attributed to the declarations or omissions of one party, in the eyes of the IRS, such additional tax liabilities will be deemed a joint obligation, and the. IRS can go after both parties for payment.  The non-offending spouse will thereafter seek to enforce the Indemnification Agreement for reimbursement from the offending spouse.  Good luck.
The information above is general: we recommend that you consult an attorney regarding your specific circumstances.  The content of this information is not meant to be considered as legal advice or a substitute for legal representation.