The Court of Appeals recently held that a letter of intent signed as part of settlement discussions between two parties who were litigating over the ownership and use of parking spaces was unambiguous and constituted an enforceable contract between them even though the lease that was to guide the relationship of the parties for 99 years had not been agreed upon. Falls Garden Condo. Ass’n, Inc. v. Falls Homeowners Ass’n, Inc., filed Jan. 27, 2015.
In so doing, the court reached a contrary result from its decision in another case, Cochran v. Norkunas, 398 Md. 1, 919 A.2d 700 (2007).
Falls Garden Condominium Association Inc. (“Falls Garden”) is an association of condominiums near Falls and Old Pimlico Roads in Baltimore County. It is adjacent to The Falls Homeowners Association Inc. (“The Falls”), which consists of 112 townhomes. For 23 years extending to 2008, Falls Garden thought it owned the 67 parking spaces between the two developments, but in 2009 it found out that it did not have title to the spaces. Falls Garden filed a complaint for declaratory judgment in the Circuit Court for Baltimore County requesting a determination that it owned 39 of the 67 spaces by adverse possession or that it held an easement over them by prescription or by necessity.
Before the trial date, the parties entered into settlement discussions that led to a “Letter of Intent.” The Letter of Intent, signed by counsel to the parties, said the parties would enter into a lease with a term of 99 years for certain of the parking spaces, and The Falls sent a draft of such a lease to Falls Garden. Falls Garden did not accept the lease as drafted and contended the Letter of Intent was not enforceable.
The Falls moved to enforce the settlement agreement. After a hearing, the judge noted that even though the Letter of Intent did not state on its face whether the parties intended to be bound by it, it reflected the agreement that the parties reached. Therefore, the court granted the motion.
The Court of Special Appeals affirmed in 2013, finding the Letter of Intent was unambiguous and that “a reasonable observer would conclude the parties intended to be bound.”
The Court of Appeals issued a writ of certiorari. In its published opinion last month, it reached the same result as the lower courts as to the enforceability of the Letter of Intent.
In doing so, the court relied extensively on Cochran and on Joseph M. Perillo, Corbin on Contracts.
In Cochran the Court of Appeals held that a particular letter of intent signed by prospective seller and buyers of residential real estate was not enforceable. Despite this result, the Cochran court stated that a letter of intent can constitute an enforceable contract. Also, the court noted, the fact that a letter of intent “explicitly contemplates future agreements does not make it unenforceable.”
In Cochran the letter of intent was only several paragraphs long, but included all the business terms of the transaction. It provided that the parties would sign the standard form Maryland Realtors contract. After the seller received the form contract and addenda to it, she had seller’s remorse and decided not to proceed. The buyers sued for specific performance.
The Court of Appeals looked to Corbin, which sets forth the following four categories of letters of intent:
(1) the parties, or at least one of them, state that they do not intend to be bound;
(2) the parties highlight one or more points on which there has yet to be agreement;
(3) the parties express definite agreement on all necessary terms, but are silent on other provisions which are usually included in contracts; and
(4) situations like category (3) except that the parties state their intention that the letter of intent forms a binding contract.
Definite or indefinite?
The Cochran court stated that a contract has been made if it falls within either category (3) or (4). It held that, to form a contract the parties must have the intent to be bound and there must be definiteness of terms in a letter of intent.
In Cochran, the court determined that the parties did not show the requisite intent to be bound because the letter of intent referred to the form realtors contract in three places, and a reasonable person, therefore, would have understood that a formal contract was to follow the execution of the letter of intent.
When the court analyzed the Letter of Intent in Falls Garden, it considered the difference between Corbin’s categories (2) and (3) to be whether the terms of the Letter of Intent were definite or indefinite. According to the court, this “informs the central question of whether there was an intent to be bound and, thus, mutual assent.”
The court also found that a binding letter of intent must address all the material terms relating to the subject, citing Peoples Drug Stores, Inc. v. Fenton Realty Corp., 191 Md. 489 (1948), and Corbin. The opinion notes that, in Falls Garden, both the circuit court and the Court of Special Appeals agreed that the Letter of Intent included all of the material terms and that they were definite.
Falls Garden argued that the Letter of Intent was not enforceable because it clearly anticipated that there would be a lease, that the form of the lease had not been agreed upon, and that Falls Garden did not accept the form of lease that The Falls sent to it. Falls Garden noted five business points addressed in the lease with which it took issue.
The Court of Appeals, however, ruled that the Letter of Intent was inclusive and definite as to all material terms. It considered the Letter of Intent to be in Corbin’s category (3), and therefore enforceable.
But — unlike the lower courts — the Court of Appeals declined to hold that the lease referred to in the Letter of Intent was enforceable. The court found the lease was merely a draft that was not agreed to by The Falls and that specific performance was not available to enforce it.
How can the Falls Garden Letter of Intent be enforceable if the lease — which is to control the relationship of the parties for nearly a century — is not enforceable? What if each party refuses to budge from its positions on the five open points, or on any of them? They cannot walk away and say there is no deal: the Court of Appeals held that the Letter of Intent is an enforceable agreement, and the Letter of Intent unequivocally provides there will be a lease.
So, who decides on the provisions of the lease that are not explicitly set forth in the Letter of Intent? Will a stalemate trigger yet another round of litigation?
The Court of Appeals in both Falls Garden and Cochran cited Corbin for the proposition that “[i]f the document or contract that the parties agree to make is to contain any material term that is not already agreed on, no contract has yet been made; the so-called ‘contract to make a contract’ is not a contract at all.” Doesn’t the failure to have an agreed-upon lease make the Letter of Intent a “contract to make a contract”?
If the letter of intent in only one of the Falls Garden and Cochran cases were to be held to be enforceable, shouldn’t it have been the one in Cochran? In each case, all material terms were specified in the applicable letter of intent. In each case, the applicable letter of intent stated that the parties would later sign another, more definite document.
The document to be signed later in Falls Garden was a commercial lease that was not a “shelf document” but had numerous provisions open to negotiation between the parties. Indeed, the Letter of Intent expressly stated that the lease would contain a number of other “usual and customary” provisions, and proceeded to identify a non-exclusive list of those provisions. The form of lease was not available to Falls Garden at the time the Letter of Intent was signed, unlike the standard Maryland Realtors form readily available through a broker.
The Cochran letter of intent repeatedly referred to the form Maryland Realtors contract, which is a standard form. There were no terms left to negotiate after the Cochran letter of intent was signed, and the seller never articulated any point that was not agreed to by the parties. She merely changed her mind about selling her house.
Falls Garden and Cochran are two factually very similar cases that reached diametrically opposite results. To avoid being in a position where it is virtually undeterminable whether a court will find your letter of intent to be an enforceable contract, it is important to explicitly provide in the letter of intent if it is intended to be binding on the parties.
If the parties desire that they are both bound to the deal specified in the letter of credit once it is signed, the letter of intent should so state. If the parties do not want to be bound unless subsequent transaction documents are fully negotiated, executed and delivered, the letter of intent should contain such a provision.
Otherwise, the parties may find themselves in the murky netherworld between categories (2) or (3) of Corbin’s analytical framework.
Here is suggested language that the parties could include in a letter of intent which should make their intentions clear:
“This is merely a letter of intent which sets forth some, but not all, of the terms of the subject transaction, and other material terms remain subject to negotiation. The parties agree that neither is bound by the provisions of this letter of intent. Each agrees that neither it nor the other party to this letter of intent will be legally bound unless and until they have both executed and delivered other documents. If and when that occurs, the parties will be bound by the provisions in those documents, and not by the terms of this letter of intent.”
Edward J. Levin is Chair of the Real Estate Practice Group at Gordon Feinblatt LLC. He may be reached at firstname.lastname@example.org or (410) 576-1900. Copyright Edward J. Levin 2015. All rights reserved. Ed would like to thank Kevin L. Shepherd of Venable LLP for his thoughtful comments and suggestions.