In the Spotlight: Agreement to Agree, Enforceable?

Recently, the Court of Special Appeals of Maryland held that a letter of intent was binding on the parties. Windsor Development, L.L.C. v. Clearcomm Technologies, Inc., No. 999 (Md.App. filed Aug. 5, 2002). The court granted a summary judgment motion enforcing the provisions of the letter of intent relying on the “plain and unambiguous” language.

In Windsor, the potential landlord, Windsor, and the potential tenant, Clearcomm, executed a letter of intent specifying the terms of a commercial lease agreement. The letter of intent required Clearcomm to post a nonrefundable deposit of $5,000 at the time of execution of the letter of intent. The letter of intent also required Clearcomm to post an additional nonrefundable deposit of $10,000 to be paid upon the execution of the lease. Windsor was to apply $8,000 of the foregoing deposits to rent and the remaining $7,000 was to be held as the security deposit under the lease. The letter of intent contained a rent schedule and an option for Clearcomm to rent additional space in the building.

A couple of weeks after the letter of intent was executed, Windsor sent a fax to Clearcomm inquiring “what individuals will sign personally on this lease agreement.” Clearcomm responded via fax stating that it was an S-corporation and identified the individuals that would be signing on behalf of Clearcomm. The fax also stated that no personal guarantees would be given. Shortly thereafter Windsor forwarded the lease, containing personal guarantees, to Clearcomm. Upon receipt of the lease, Clearcomm sent the additional $10,000 deposit. More than 2 months later, Windsor realized Clearcomm never returned executed copies of the lease. Shortly thereafter, Clearcomm sent a letter to Windsor stating that it was not going to execute the lease and sought the return of the entire deposit. Clearcomm sent another letter approximately 2 months later stating that it found another location and would not enter a lease with personal guarantees.

Windsor filed suit for economic damages caused by Clearcomm's breach of the lease. The court determined the letter of intent was binding when Clearcomm paid the initial $5,000 deposit. However, since the lease was never executed and there was “no meeting of the minds” as to the personal guarantees, the court did not award economic damages.

The court relied on Horsey v. Horsey which found an exception to the rule that “preliminary negotiations resulting in an agreement to reach an agreement, such as a letter of intent, do not constitute a binding contract …” 329 Md. 392, 420, 620 A.2d 305 (1993). “Maryland, in fact, recognizes 'that agreements to agree serve a valuable commercial purpose and that the traditional rule [finding these agreements unenforceable] may operate unfairly where a party uses the rule to defeat an agreement that the parties intended to be binding.'” Windsor at 4-5, citing Horsey, 329 Md. at 421 n.11; John D. Calamari & Joseph M. Perillo, The Law of Contracts, 2.9(a)(3)(4th ed. 1998).

Applying this exception to the traditional rule, the court in Windsor found that the “plain and unambiguous” language of the letter of intent was binding. Windsor at 5. The court stated: “[u]nlike other simple agreements to enter into contract negotiations, the letter of intent here contained a general understanding of what the parameters of the final lease agreement would entail.” Id. The letter of intent contained key lease provisions, including the term, rental rates and a lease option. Clearcomm accepted the terms by executing the letter and subsequently positing the initial deposit.

Windsor argued that Clearcomm's actions must be construed as an acceptance of the lease. However, the court determined the letter of intent was clear and the $10,000 additional deposit “became non-refundable upon the execution of the lease, and not before.” Id. at 6. There was no meeting of the minds as to the personal guarantees and accordingly the court found that the lease was never mutually entered by the parties. “Therefore, there was no mutual assent to the final lease agreement between the parties, and, where there is no mutual assent, there is no contract.” Windsor at 7, citing Creel v. Lilly, 354 Md. 77, 101, 729 A.2d 385 (1999).

Given the foregoing, it is important for landlords and tenants alike when entering letters of intent to make sure they are comfortable with being bound to the terms therein. In the event either party intends for the letter of intent unequivocally to be an agreement to agree in the future, then specific language needs to be added to the letter of intent. As an example, the following is sample language to protect a landlord from being obligated by the letter of intent:

“The preparation and execution of this letter of intent shall in no event be deemed to be an offer or an obligation to lease the Premises, but shall be merely a part of the negotiations between the parties. Neither party to this letter of intent shall have any obligation or liability to the other whatsoever at law or in equity (including, but not limited to, any claims for detrimental reliance, partial performance, good faith, promissory estoppel or other similar types of claims) unless and until such time as both parties shall have executed and [the potential landlord] has been delivered a fully executed lease. [The potential landlord] reserves the right to negotiate with more than one prospect for the Premises and reserves the right, in its sole and absolute discretion, to select the party with whom it shall enter into a binding agreement.”

Recently, the Court of Special Appeals of Maryland held that a letter of intent was binding on the parties. Windsor Development, L.L.C. v. Clearcomm Technologies, Inc., No. 999 (Md.App. filed Aug. 5, 2002). The court granted a summary judgment motion enforcing the provisions of the letter of intent relying on the “plain and unambiguous” language.

In Windsor, the potential landlord, Windsor, and the potential tenant, Clearcomm, executed a letter of intent specifying the terms of a commercial lease agreement. The letter of intent required Clearcomm to post a nonrefundable deposit of $5,000 at the time of execution of the letter of intent. The letter of intent also required Clearcomm to post an additional nonrefundable deposit of $10,000 to be paid upon the execution of the lease. Windsor was to apply $8,000 of the foregoing deposits to rent and the remaining $7,000 was to be held as the security deposit under the lease. The letter of intent contained a rent schedule and an option for Clearcomm to rent additional space in the building.

A couple of weeks after the letter of intent was executed, Windsor sent a fax to Clearcomm inquiring “what individuals will sign personally on this lease agreement.” Clearcomm responded via fax stating that it was an S-corporation and identified the individuals that would be signing on behalf of Clearcomm. The fax also stated that no personal guarantees would be given. Shortly thereafter Windsor forwarded the lease, containing personal guarantees, to Clearcomm. Upon receipt of the lease, Clearcomm sent the additional $10,000 deposit. More than 2 months later, Windsor realized Clearcomm never returned executed copies of the lease. Shortly thereafter, Clearcomm sent a letter to Windsor stating that it was not going to execute the lease and sought the return of the entire deposit. Clearcomm sent another letter approximately 2 months later stating that it found another location and would not enter a lease with personal guarantees.

Windsor filed suit for economic damages caused by Clearcomm's breach of the lease. The court determined the letter of intent was binding when Clearcomm paid the initial $5,000 deposit. However, since the lease was never executed and there was “no meeting of the minds” as to the personal guarantees, the court did not award economic damages.

The court relied on Horsey v. Horsey which found an exception to the rule that “preliminary negotiations resulting in an agreement to reach an agreement, such as a letter of intent, do not constitute a binding contract …” 329 Md. 392, 420, 620 A.2d 305 (1993). “Maryland, in fact, recognizes 'that agreements to agree serve a valuable commercial purpose and that the traditional rule [finding these agreements unenforceable] may operate unfairly where a party uses the rule to defeat an agreement that the parties intended to be binding.'” Windsor at 4-5, citing Horsey, 329 Md. at 421 n.11; John D. Calamari & Joseph M. Perillo, The Law of Contracts, 2.9(a)(3)(4th ed. 1998).

Applying this exception to the traditional rule, the court in Windsor found that the “plain and unambiguous” language of the letter of intent was binding. Windsor at 5. The court stated: “[u]nlike other simple agreements to enter into contract negotiations, the letter of intent here contained a general understanding of what the parameters of the final lease agreement would entail.” Id. The letter of intent contained key lease provisions, including the term, rental rates and a lease option. Clearcomm accepted the terms by executing the letter and subsequently positing the initial deposit.

Windsor argued that Clearcomm's actions must be construed as an acceptance of the lease. However, the court determined the letter of intent was clear and the $10,000 additional deposit “became non-refundable upon the execution of the lease, and not before.” Id. at 6. There was no meeting of the minds as to the personal guarantees and accordingly the court found that the lease was never mutually entered by the parties. “Therefore, there was no mutual assent to the final lease agreement between the parties, and, where there is no mutual assent, there is no contract.” Windsor at 7, citing Creel v. Lilly, 354 Md. 77, 101, 729 A.2d 385 (1999).

Given the foregoing, it is important for landlords and tenants alike when entering letters of intent to make sure they are comfortable with being bound to the terms therein. In the event either party intends for the letter of intent unequivocally to be an agreement to agree in the future, then specific language needs to be added to the letter of intent. As an example, the following is sample language to protect a landlord from being obligated by the letter of intent:

“The preparation and execution of this letter of intent shall in no event be deemed to be an offer or an obligation to lease the Premises, but shall be merely a part of the negotiations between the parties. Neither party to this letter of intent shall have any obligation or liability to the other whatsoever at law or in equity (including, but not limited to, any claims for detrimental reliance, partial performance, good faith, promissory estoppel or other similar types of claims) unless and until such time as both parties shall have executed and [the potential landlord] has been delivered a fully executed lease. [The potential landlord] reserves the right to negotiate with more than one prospect for the Premises and reserves the right, in its sole and absolute discretion, to select the party with whom it shall enter into a binding agreement.”