Are Letter Agreements Binding Contracts or Not?

New Jersey business partners often execute letter agreements, which outline the fundamental terms of the business transaction prior to consummating the final contract.

However, when deals go south, poorly drafted letters of intent can lead to messy breach of contract lawsuits.

In a recent breach of contract case, a New Jersey judge refused to compel the consummation of a business deal based on a letter of intent between the parties. AECOM Capital Management v. Hartz Mountain Industries Inc. involved the purchase and sale of a Jersey City parking lot, which was slated for residential development.

During their negotiations, Hartz Mountain and AECOM entered into a letter agreement, which established a $50 million purchase price, allowed AECOM to conduct due diligence, and prohibited Hartz Mountain from negotiating with other buyers for 60 days. The final deal was contingent upon execution of a purchase agreement. Hartz Mountain did entertain other offers during the exclusivity period and ultimately decided to sell to another buyer. AECOM filed suit, seeking specific performance.

The court ultimately concluded that a letter of intent did not create an enforceable interest in the property, despite the fact that AECOM had accumulated sizable due diligence fees. Thus, Hudson County Superior Court Judge Hector R. Velazquez ruled that specific performance was not an appropriate remedy.

“There were a number of important issues yet to be resolved…and the final contract was certainly not ready to be executed by any of the parties,” the Court stated. Judge Velazquez further noted that the evidence indicated that the parties, both of whom were represented by highly experienced lawyers, intended to be bound only by a final and fully executed purchase agreement.

“It certainly…would not be equitable to enforce an unsigned agreement that was still being negotiated simply because the Plaintiff engaged in the due diligence and chose to commence its construction and development process,” Judge Velazquez added.

To avoid a similar fate, businesses are advised to seek the assistance of an experienced New Jersey business attorney, to make it more clear that there are portions of the letter of intent that are enforceable agreements in and of themselves, even if a final transaction remains to be negotiated.  It is key that that the wording of the letter of intent should be drafted to reflect the true intent of the parties.

If you have any questions about this case or would like to discuss the legal issues involved, please contact me, Victor Kinon, or the Scarinci Hollenbeck attorney with whom you work.