Commercial Division Blog
Letter of Intent Binding Contract Requiring Parties to Negotiate and Consummate Sale Transaction
On January 28, 2019, Justice Ash of the Kings County Commercial Division issued a decision in A.J. Richard & Sons, Inc. v. Forest City Ratner Cos., LLC, 2019 NY Slip Op. 30215(U),holding that a letter of intent was a binding agreement to negotiate and consummate a sale transaction, explaining:
In determining whether the parties intended to enter into a binding contract, an objective test is generally to be applied, which means that the manifestation of a party's intention rather than the actual or real intention is ordinarily controlling. The manifestation of a party's intention to be bound by an agreement is evidenced by its language and terms. On a motion for summary judgment, the construction of an unambiguous contract is a question of law for the court, and the intention of the parties is to be gathered from the language and terms of the instrument itself.
Here, the language and terms of the LOI manifest the parties' intention to be bound by the LOI. The LOI set forth all of the material terms of the agreed-upon transaction, including the parties, purchase price, location, and size of the Replacement Property; mortgage arrangements; Go Dark Payments; assumption of costs; and terms of delivery. The LOI further included detailed specifications with respect to the Replacement Property, including parking spaces, loading dock requirements, and a preliminary floor plan which could only be changed upon the reasonable approval" of A.J. Richard. In addition, the LOI provided that Forest City will deliver the Replacement Property to [A.J.] Richard substantially complete in 'vanilla box' condition," which is defined therein as meaning that Forest City shall provide," among other things, specified electrical system capacity, and meet certain air conditioning system requirements, accessibility requirements, and requirements for plumbing, sprinklers, and modes of ingress and egress.
Forest City asserts that the LOI requires the parties to negotiate the specific terms and conditions of the sale of the property be set forth in a purchase and sale agreement and a development agreement, i.e., the Implementing Documents, and that the LOI also calls for the preparation of a condominium offering plan, declaration and condominium bylaws. Forest City argues that this renders the LOI a non-binding agreement to agree and unenforceable as a contract.
Forest City's argument is rejected. A contract does not necessarily lack all effect merely because it expresses the idea that something is left to future agreement. Where an agreement contains all of the essential terms of the contract, the fact that the parties intended to negotiate a fuller agreement does not negate its legal effect. Thus, an agreement is not rendered ineffective simply because certain non-material terms are left for future negotiation or because the agreement states that the parties will execute a furthermore formal agreement. Where the parties have manifested an intention to make a binding agreement, the mere fact of open terms will not permit them to disavow it.
While it is true that if an agreement leaves open terms of too fundamental importance, it may be incapable of sustaining binding legal obligation, here, the matters to be negotiated are non-essential terms that concern fine details, which may still be decided by the parties without effecting the viability of the contract. Such terms are by no means incompatible with the intention to be bound.
With respect to the fact that the LOI requires Forest City to prepare and deliver Implementing Documents (i.e., the purchase agreement and the development agreement), this does not render the LOI unenforceable. The LOI contains all of the essential terms of a binding contract, and does not contain an express reservation by either party of the right not to be bound until a more formal agreement is signed. The fact that there would be a preparation of a condominium offering plan, declaration and condominium bylaws before A.J. Richard could take possession of the Replacement Property also does not affect the binding nature of the LOI.
. . .
Forest City asserts that the LOI did not state that the parties intended to be legally bound. However, there is no requirement in a contract that it state that the parties are bound by it. Rather, it is the fact that the language of the agreement evinces a binding contract which determines that the parties are bound.
(Internal quotations and citations omitted).
In New York, a contract must contain the material terms of the agreement to be binding. As this decision shows, there sometimes are disputes over whether all the material terms of the contract are embodied in the agreement being sued upon. Contact Schlam Stone & Dolan partner John Lundin at firstname.lastname@example.org if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.