Most negotiations for real estate purchases and leases begin with the parties entering into letters of intent, intended to form the basis for the negotiation of a definitive agreement. Often such LOI’s are non-binding on the parties until such definitive agreement is fully executed. Unfortunately, many of such letters of intent are ambiguous as to whether the parties intend to be bound, giving rise to litigation and liability for the parties.
The Ninth Circuit Court of Appeal has held that an executed letter of intent, entitled “Final Proposal” and clearly indicating that the parties intended to enter into a future definitive agreement, was an enforceable lease. The “Final Proposal” was the result of various exchanges of offers and counters. Despite the tenant’s assertion that it was merely an agreement to agree, the Court concluded it was an enforceable agreement. Although the early iterations of the proposals included a clause that it was non-binding, the “Final Proposal” did not contain the non-binding language. As a result, the Court upheld the trial court’s $15.9 million damage award to the landlord.
Even where the LOI is expressly “non-binding” and clearly subject to the mutual execution of a definitive agreement, liability can arise. A recent California Court of Appeal considered breach of contract, breach of the covenant of fair dealing and fraud claims of the tenant, Thrifty Payless, Inc., against its landlord, Americana at Brand. Landlord and tenant had negotiated a non-binding letter of intent for space in the retail center owned by landlord, and subsequently entered into a definitive lease. The exchanges involved in the LOI negotiation included landlord’s estimates of tenant’s pro-rata shares of taxes, insurance premiums and CAM charges. Specific estimates of these amounts were provided by the landlord in various iterations of the letter of intent, with such estimates eliciting several requests by tenant for a breakdown of the amounts. On the final letter of intent, tenant struck the estimated number for annual CAM charges ($14.50 psf/month) and hand wrote a notation “Budget to be provided Tenant prior to lease execution.”
Eventually, a lease was executed and Thrifty took possession of space in the center. When landlord first invoiced the tenant for its proportionate share of taxes, insurance and CAM charges, the tenant was dismayed at the difference in the amounts being billed from the estimates previously provided in the LOI. The tax bill was $169,686, instead of the estimated $43,836; insurance charges were $28,110, instead of the estimated $11,689.60; and CAM charges were $412,307, instead of the estimated $211,874. In addition, tenant’s proportionate share of such charges increased from 2.2 percent to 5.67 percent.
Landlord argued that the lease expressly provided that tenant was entering into the lease based upon its own investigations, that the tenant had not asserted that landlord had breached any express term of the lease, that the lease included an integration clause which merged prior negotiations and discussions into the lease, and that the numbers included in the letter of intent were only estimates which could not be relied upon.
The court considered tenant’s claims that landlord had failed to allocate certain costs and expenses to the various cost pools contemplated in the lease, had failed to properly account for revenue received for application to CAM expenses, and had entered into various leases where certain tenants were charged less than their full proportionate share. Pointing to the “huge disparity between the estimated and the ultimate costs,” the court concluded that the tenant pled claims sufficient to support fraud and negligent misrepresentation. The court noted that where one party has special knowledge, “a statement couched as an opinion” can be treated as a misrepresentation of fact. What clearly troubled the court were landlord’s action in treating some tenants differently in allocation of responsibility for taxes, insurance premiums and CAMs, as well as landlord’s “grossly inaccurate estimates” contained in the letter of intent.
Reading the case as one supporting the proposition that estimates in letters of intent may ultimately be binding upon the parties would be superficial. This case had unique facts which led to the court’s decision supporting tenant’s right to pursue its claims. The enormous disparity between the estimates and the actual amounts billed, coupled with landlord’s conduct in favoring other tenants to the detriment of Thrifty Payless, resulted in the court’s decision. The lesson here is not to avoid providing estimates, but to provide reasonable estimates, clearly label them as such, and don’t subsequently take actions which make those estimates wildly inaccurate to the detriment of the other party.
VIEWS EXPRESSED ARE THE PERSONAL VIEWS OF THE AUTHOR AND DO NOT REPRESENT THE VIEWS OF ROBERT THORNBURGH, KIDDER MATHEWS, LOCKE LORD LLP, ITS PARTNERS, EMPLOYEES OR ITS CLIENTS. FURTHERMORE, THE INFORMATION PROVIDED BY THE AUTHOR IS NOT INTENDED TO BE LEGAL ADVICE AND DOES NOT CREATE AN ATTORNEY-CLIENT RELATIONSHIP.