Mark's Market Musings
Despite a global pandemic and a bingo-card full of natural disasters and calamities, the commercial real estate market has been extremely active over the past two years. While there are some signs that activity will be less frenetic in the upcoming year, most commentators project continued growth, development and overall volume. Many of our clients are already eyeing next year’s targets, beginning the negotiation process with the hopes of getting these deals under contract in the first quarter of 2021. Given these efforts, we thought it might be helpful to offer a friendly reminder regarding the importance and dangers of letters of intent.  
A letter of intent is “the preliminary understandings of parties who intend in the future to enter into a contract.”[1] These documents can be a convenient way for parties to memorialize and confirm the parameters of their transaction before proceeding to a final agreement. Letters of intent are typically non-binding, providing that the document is merely a summary of critical terms and is not actually enforceable against the parties until it is reduced to a final, signed contract. These types of provisions are generally respected by California courts, as a letter of intent that unambiguously states that it is not intended to be binding will not be construed as binding.[2] 
However, even though the letter of intent may include a non-binding provision, a letter of intent may create legal obligations for the parties, including the obligation to negotiate in good faith.[3] All contracts in California contain the implied covenant of good faith and fair dealing, meaning that the parties must act in good faith to perform their obligations consistent with the intent of the agreement.[4] In the letter of intent context, “[a] court will enforce a ‘contract to negotiate the terms of an agreement.’ But a party is liable under such an agreement ‘only if a failure to reach ultimate agreement resulted from a breach of that party’s obligation to negotiate or to negotiate in good faith.’” [5] This means that even if a letter of intent is non-binding, a party can still be held liable for breaching that agreement if it does not negotiate in good faith. If one party has a change of heart or finds a better deal and terminates negotiations after a letter of intent is signed, that party may be liable for failing to negotiate in good faith.
For these reasons, parties should exercise great care in drafting letters of intent. A provision providing that the letter of intent is non-binding should clarify that this means the parties can refuse to agree for any reason or no reason at all, and that neither party has any obligation to negotiate in good faith. Moreover, parties should carefully explain their reasons for declining a proposed transaction or ultimately rejecting the transaction after a letter of intent is signed. While letters of intent serve as important tools for deal-making, they should not undermine the flexibility each party has to negotiate outstanding terms or decline to proceed with the proposed arrangement.
[1] Rennick v. O.P.T.I.O.N. Care, 77 F.3d 309, 315 (9th Cir. 1996).
[2] See, e.g., Brezoczky v. Domtar Corp., 770 Fed. Appx. 353, 354 (9th Cir. 2019).
[3] Southern Union Co. v. Southwest Gas Corp., 180 F. Supp. 2d 1021, 1043 (D. Ariz. Jan. 2, 2002).
[4] Steiner v. Thexton, 48 Cal. 4th 411, 419 (2010).
[5] A.R. Thomson Group v. Harbor Seal, 2020 U.S. Dist. LEXIS 118107, *10, 2020 WL 3628712, quoting Copeland v. Baskin Robbins U.S.A., 96 Cal. App. 4th 1251, 1257 (2002).
Ken Conlan contributed to the authorship of this article.
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Welcoming Ken Conlan
As you may have seen in our last newsletter, our team is growing! Ken Conlan recently joined the Weintraub Tobin real estate practice group, adding more depth and experience to our transactional team. Given the velocity in the commercial real estate market, Ken’s addition will help us continue to provide quality and timely legal services to our valued clients. We’re thrilled to welcome Ken, and we’re confident you’ll enjoy working with him.  
Meet Mark Ellinghouse and Kenneth Conlan
I am an attorney that assists clients with commercial real estate matters, including buying, selling, leasing, and management of real property. I also help clients structure investments in real estate, handling projects relating to financing, investment, and joint ventures. In addition, I regularly advise clients on general corporate matters, from formation and management to operating issues to third party contracts for licensing, research and development. I have a diverse background, with experience in private practice and in-house counsel, on both litigation and transactional cases, and in non-legal roles. I like working with sophisticated clients who demand top notch legal advice to help them manage their legal issues in an efficient and effective manner. I look forward to working and/or connecting with you soon.  

Mark Ellinghouse 916-558-6091

I am an attorney in Weintraub Tobin’s Real Estate Practice Group based in Sacramento. I work on transactional commercial real estate matters, including leasing, purchase and sale agreements, financing and short-term licenses, such as event venue and film location contracts. I support clients involved in a broad range of industries, including hospitality, developers and home builders, entertainment, office, retail, agricultural, industrial and government. I also work on corporate matters including mergers and acquisitions, stock transactions, entity formation and governance. My background is in private industry, government and nonprofit organizations. I like to work closely with clients to provide practical and productive legal services.

Kenneth Conlan 916-558-6039