Nonbinding Letter of Intent Not Equal to Contract

April 13, 2009
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A large retail bank approached an owner about leasing space so that it could open a branch in Pennsylvania. After several discussions and an assessment of the premises, the bank determined that the premises would not be suitable for its design. As a result, the bank sought and found more suitable space to the west of the premises.

After securing the suitable space, the bank went back to the owner of the original premises and signed a nonbinding letter of intent (LOI), meaning that it would not be bound by the terms agreed to during negotiations until there was a signed lease. Negotiations broke down, and the bank informed the owner that it found an alternative space. The owner sued the bank, claiming that it violated the terms of the LOI.

A Pennsylvania court, which ruled in favor of the bank, said that a breach of contract claim would require the owner to show: (1) a contract between it and the bank; (2) the essential terms of the contract; (3) a breach of duty under the contract; and (4) damage resulting from that breach.

In this case, the court noted that the owner’s claim failed at stage one because there was no contract. The bank signed a nonbinding LOI, which meant that it was not obligated to honor the terms. Because there was no duty to honor the terms, there was no contract [WP 851 Associates, L.P. v. Wachovia Bank NA, February 2009].