What should I do with a letter of intent?

QUESTION: One of my listing agents received a letter of intent drafted by an attorney and signed by a potential buyer. The buyer is interested in a property that is currently under contract. After reading it over, it looks like the potential buyer wants the seller to agree that if the current contract terminates, the seller will go under contract with the buyer. Is this an offer? How should we handle this situation?

ANSWER: A letter of intent is generally considered to be a non-binding agreement to enter into a future contract, in other words, an agreement to agree. However, that is not always the case. Courts in North Carolina will enforce the terms of a letter of intent if it otherwise meets the elements for an enforceable contract, which are assent, mutuality of obligation, and definite terms. If it is clear under the circumstances that the parties intended to be bound by the terms of a letter of intent, the courts will treat it as binding rather than an agreement to agree.

The purpose and binding nature of a letter of intent will vary from case to case. Brokers should therefore be very cautious if they receive one. In your situation, we would recommend treating it like an offer and submitting it to your seller. Be sure to strongly recommend in writing that they seek legal counsel before signing it or negotiating with the other party about any terms within the letter of intent.

If your seller is open to accepting a back-up offer, you could recommend that they counter with an offer to purchase that has a back-up contract addendum instead of responding to the letter of intent. For residential transactions, this can be accomplished with the Back-up Contract Addendum (Form 2A1-T). In commercial transactions, the Back-up Agreement Addendum (Form 581A-T) can be used. Using a contract rather than a letter of intent will clear up any uncertainty as to whether the parties have a binding agreement.

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Filed Under: Contract Law,