“Letter of Intent” Is It a Good Idea?

By Yaacov Epstein

Yitzchak M. was dressed impeccably as he sat nervously in court waiting to be dealt the final verdict. A few short minutes later, he broke out in tears when the judge gave the verdict that Yitzchak was required to pay the plaintiff 150,000 NIS. Do not think Yitzchak is a foolish or ignorant man. He just happened to make a very serious mistake which has sadly become all too common when purchasing an apartment in Israel.

A large number of my clients have encountered a similar situation as Yitzchak had when buying their apartments. After viewing many apartments, the buyer finally (!) found the ideal apartment for his/her needs. While the buyer is considering the purchase, someone connected to the purchase, will suggest that in order to secure the apartments purchase or sale, the buyer and seller just sign a “letter of intent” (in Hebrew – “Zichron Devarim) in which the seller and buyer agree on the basic terms of the transaction. Often, it is suggested that the letter of intent state that it does not in any way constitute a contract; in addition, it is suggested, the letter state that an actual contract will be signed within 14 days by an attorney. This certainly sounds like a good idea that guarantees the price and apartment for the buyer and/or seller and “guarantees” that the attorney has a chance to complete his due diligence. But in reality, this plan of action can have considerable negative consequences and be an expensive mistake.

Let us examine a case which was decided by a court in Israel one year ago. I have slightly modified some details to ease your understanding of the circumstances.

Let’s start at the beginning of the story that I described above. After a long search, Yitzchak finally found the apartment that he liked. Sitting down with Moshe in the apartment’s spacious living room, Yitzchak was very nervous that Moshe would sell the apartment to someone else. So, Moshe and Yitzchak sat down to write the following document:

A Letter of Intent to Purchase Real Estate

  1. Mazel tov! Moshe and Yitzchak hereby come together at this auspicious time and agree that Moshe will sell to Yitzchak, and Yitzchak will buy from Moshe, all of Moshe’s rights to the apartment at 5 Lincoln St., Jerusalem
  2. Payment for this transaction is set in the amount of NIS 1,500,000
  3. Ownership of the property will be transferred to Yitzchak on October 15, 2013. Four air conditioners will remain in the apartment
  4. Both sides agree that, if either side shall renege on this agreement, the reneging party must compensate the other party in the amount of NIS 150,000
  5. Signed Moshe and Yitzchak

After signing this letter of intent, Yitzchak, the buyer, discovered that the true value of the apartment was far lower than the price he agreed to pay. In addition, he discovered that the apartment had certain flaws that he considered unacceptable. He therefore informed Moshe that he was no longer interested in the apartment and was cancelling what he considered their non-binding agreement, since they had not yet signed an actual contract.

In response, Moshe, the seller, had his attorney send Yitzchak a breach of contract letter with a demand for payment of the agreed upon compensation in the amount of NIS 150,000. Yitzchak refused to pay and Moshe sued Yitzhak.

In his defense, the buyer claimed the letter of intent was not binding. He claimed that he only signed after being pressured to do so and was told that the letter of intent was not binding. Based upon these assurances, Yitzchak therefore did not consider the agreement or the document binding.

The seller, for his part, claimed that the agreement was binding, since it was signed after both parties expressed an interest in this transaction. The document outlined all of the substantial conditions of the sale, such as the type of property, price, possession date, and so on. Moshe therefore considered the document binding.

The court ruled in favor of the seller and stated that a letter of intent is a legally binding document in every sense. This ruling was based on the fact that the substantial elements of the transaction had been outlined in the letter of intent: the names of both parties, a description identifying the property, the nature of the transaction, the price, possession date and compensation for breach of contract. This letter of intent is therefore considered a contract in every sense of the word.

Moreover, the letter of intent was written in a manner detailed enough so as to list items that would remain in the apartment (“Four air conditioners will remain in the apartment”). This, too, shows the parties’ intent to create a legally binding arrangement.

The court therefore found that the buyer was in breach of the letter of intent and must compensate the seller in the full amount agreed upon, as well as Moshe’s legal fees.

In light of countless of similar court decisions—all of which determined that the letter of intent is a valid contract—my recommendation to all of my clients, without exception, is not to sign a letter of intent without legal review. The letter of intent is a contract, and contracts should not be signed without an attorney. Some of my clients have experienced problems far worse than those outlined in the example above. It is important to realize that it is better to pass up the opportunity to buy this specific apartment than enter into a sizeable purchase without a lawyer’s careful examination—an examination whose purpose is to protect the buyer’s rights. The alternative could often lead to costly consequences as described above.

*The story above is based on an actual civil court case adjudicated in the Petach Tiqva Magistrates Court in May 2015

 

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