Letters of Intent in Tennessee Real Estate Transactions: “Agreements to Agree” or Binding, Enforceable Contracts?
As the saying goes, the road to hell is paved with good intentions. So, too, is the road that leads to failed real estate transactions. A buyer and seller can share an intention to enter into a deal and agree in principle to the broad outlines – or even several details – of a transaction. They may then illustrate their agreement in a document called a “letter of intent.” But if one party walks away from the envisioned transaction, can the other party enforce that letter of intent?
Letters of intent exist in a kind of contractual purgatory. They are not always contracts, but a court can treat a letter of intent as an enforceable agreement if the parties manifest their intention to be bound by its provisions and the letter includes the agreement’s essential terms. Without both of those elements, a letter of intent will be seen as nothing more than an unenforceable “agreement to agree.”
Both Parties Must Intend To Be Bound by the Letter
A key factor in determining whether a court will enforce a letter of intent like a contract is determining the parties’ intention when executing the document. Unless both parties made clear their intent to create binding obligations through the letter, it likely would not be considered an enforceable agreement. “An agreement to agree to something in the future is not generally enforceable.” Four Eights, LLC v. Salem, 194 S.W.3d 484, 486 (Tenn. Ct. App. 2005)
When determining whether the parties intended the letter to be a binding contract, a judge will look at the language in the letter, as well as the circumstances surrounding its negotiation, preparation, and execution.
That is why parties to a letter of intent relating to a contemplated real estate transaction should clearly spell out in the letter whether they intend for the document to create legally enforceable obligations. By using clear and concise language that specifies whether the parties see the document as a binding contract or merely an “agreement to agree,” they can spare themselves the time, expense, and risk of a judge making that decision for them.
The Letter Must Contain the Essential Terms of an Agreement
Even if both parties expressly intend their letter of intent to be binding and enforceable, a Tennessee court will not enforce it unless it contains the essential terms of the agreement. After all, it is hard to enforce contractual obligations when those obligations have not been identified in the contract.
Under Tennessee law, “[i]n order for a contract to be binding it must spell out the obligation of the parties with sufficient definiteness that it can be performed. All the essential terms of a contract must be finally and definitely settled. None must be left to determination, by future negotiations.” United Am. Bank of Memphis v. Walker, 1986 WL 11250, *2 (Tenn. Ct. App. Oct. 10, 1986)
If essential terms remain open for consideration and negotiation, a judge will not treat a letter of intent as an enforceable contract under Tennessee law. In other words, the parties must express a “meeting of the minds” on all essential terms of the agreement.
For real estate transactions, essential terms include items such as:
- Purchase price.
- Amount of earnest money.
- Payment of closing costs.
- Time period to complete property inspection.
- Closing date or conditions for closing.
If you are considering buying or selling real estate in Tennessee, a letter of intent can be a useful tool during negotiations. But if not carefully and precisely drafted to reflect the mutual intentions of both parties, it may not accomplish either party’s goals.
If you have questions about letters of intent in Tennessee real estate transactions, please contact one of the real estate attorneys at Sherrard Roe Voigt & Harbison today.[chrisdorney]/Adobe