Letters of offer, statements of intent, heads of agreement, expressions of interest, terms sheets...they're all documents that a person might be asked to sign before they enter into a commercial transaction.
That commercial transaction might be an offer to buy a property, an offer to buy a business or a company, an offer to lease premises or an offer to extend finance to an intended borrower. The list really is endless.
While many of these may in fact be non-binding, it pays to seek advice before signing anything as you may unwittingly find yourself bound to some or all of the terms contained in these seemingly innocuous documents.
Some examples that we have seen in practice include:
- a clause in an offer to lease (prepared by the landlord's leasing agent and submitted to the tenant for signing and return) stating that the lease will be on the terms of the standard lease attached to the letter of offer (as modified by the terms in the offer to lease) and that the parties will be bound by those documents from the date that is 7 days after the landlord accepts the offer to lease;
- a heads of agreement that says it is non-binding, except for particular clauses relating to confidentiality, exclusivity and indemnity;
- a heads of agreement that bound a party to pay a deposit or bond which was non-refundable if the transaction did not proceed;
- a heads of agreement that bound a party to pay a deposit or bond from which the other party could reimburse itself for costs associated with the transaction if the transaction did not proceed; and
- a letter of offer for finance, which on acceptance bound the borrower to pay significant costs and fees even if the transaction did not proceed. To make matters worse, that letter of offer was brokered by a third party whose own terms of appointment provided for substantial brokerage fees to be paid on acceptance of the letter of offer from the lender, regardless of whether or not the borrower proceeded with the loan.
You should never assume that because you anticipate more comprehensive transaction documents to be entered into at a later date, the letter of offer, heads of agreement, letter of intent etc that you are being asked to sign won't be enforceable. If the "preliminary" agreement you sign contains sufficient terms to describe your bargain with the other party and there is sufficient evidence that you intended to be bound by the document, it is open for a court to determine that a binding and enforceable agreement has been reached. Even exchanges of emails have been sufficient for courts to find that a concluded bargain has been made.
We strongly recommend seeking legal advice at the earliest stages of a commercial transaction and certainly before entering into a heads of agreement, letter of offer or other similar document. It's so important to know exactly what you're signing and what it means from a legal perspective.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.