At some juncture during the purchase of business, whether it be Stelco or the corner store, the question inevitably arises – when is the deal firm and how does one know this? Most deals close and the question rendered moot. For deals that don’t close, the disappointed party may bring action for damages or specific perormance, which is court-ordered compliance with the agreement. The Ontario Superior Court of Justice recently considered a medium-sized transaction entered into between friends for the purchase of a family run marina. The ambitious young purchaser sought to buy out the older vendor who had retirement in his sights. The parties agreed to a straightforward share purchase and sale. The framework for the sale was fleshed out over a series of dinners and meetings. The parties were prudent and consulted their lawyers for preliminary advice. One September evening, a letter of intent (“LOI”) was signed which was a well-drawn, three page document containing of the essential contractual terms such as price and closing date. the parties, as is customary, included a clause that a formal Agreement was to be drafted by their lawyers. Having signed the LOI, the purchaser immediately started working alongside the vendor to learn the ins and outs of the business. Given these circumstances, an objective observer might conclude that the vendor and purchaser had an agreement enforceable by any Court. As it turns out, this was not the case.
After months of negotiating details such as releases on personal guarantees and consulting agreements, the parties were ready to close in December. At this point in time, the vendor simply walked away on the basis that he no longer trusted the purchaser and would not want to turn over his life long marina business.The Court observed that the essential terms had all been agreed to as early as the execution date of the LOI, however, the parties never intended to be legally bound until the final Agrement was signed on the closing. It confirmed the principle that, generally speaking, an LOI is a document of intention not a legal contract.As a practical matter, most commercial LOI’s are drafted with an “agreement to follow” clause. the Court has now confirmed that this clause in and of itself undercuts the deal and in most cases makes it a “no deal”. One party cannot rely upon the LOI as the basic agreement to fall back upon if the other party tries to resile, even at the last minute and even on weak grounds.A technique increasingly employed by parties entering into an LOI to give it some backbone is the inclusion of a breakup fee. A non-refundable deposit can also bring consequence to bear.Threatened or failed closings have legal consequences often tied to the LOI. Legal advice should be sought early in the deal.