Real Estate Transactions Outline

Real Property Transactions
Professor Horning
Fall 2008
Text: Rutters Group Real Property Transactions
 
 
NEGOTIATIONS – Letters of Intent:
I.        LETTERS OF INTENT
A.      General:
1.      Definition: generally refers to a writing documenting the parties’ preliminary understanding of desire to enter into a future K.
a)     It is a guide upon which a binding K can be made
b)     Has no independent legal significance
2.      Purpose: the purpose is not to bind the parties to their ultimate contractual obligations but simply to provide the framework from which they will negotiate toward a binding K
3.      Contents:
a)     Property
b)     Price
c)      parties
4.      Analysis: Look to INTENT to see whether it is binding or non-binding
a)     Binding:
(1) Material Terms: (Contents of Letter of Intent)
(a) Property
(i)    Description of location, lot, address, legal description
(ii) APN (assessor’s parcel number) – county lot number for tax purposes.
(b) Price
(i)    RULE: if it is silent on the terms of payment it will probably still be binding, because a court can imply terms of payment, but necessarily the price
(c)   Parties
(i)    If bound by SOF (may not be though) then should be signed. If not, then letter of intent may be made out of oral discussion, which would be a K.
(ii) Parties can agree to make it binding upon signing agreement
(2) Express term “binding and enforceable K”
(a) Practice Pointer: important for express term to be used to avoid any confusion and litigation later
(3) Parties’ objective intentions
b)     Non-binding:
(1) Note: Letters of Intent are usually not binding
(2) Expressly stated – “non-binding,” “not a K” etc.
 
 
5.      Notes:
a)     not generally used to bind the parties, but can be (frequent litigation)
b)     can be a good way to focus on the material terms, psychologically commit the parties, and provide a working outline from which a K could be prepared.
c)      however, can have unintended enforceable obligations
d)     generally interpreted as the parties objective intent as evidenced by the words used.
e)     can be used for exclusive negotiating agreements
 
B.      Pros and Cons
1.      Pros:
a)     Creates a basic framework to continue the K negotiations
b)     May psychologically commit the parties to the transaction
c)      Can focus the parties on the material terms
d)     Occasionally letter of intent are also used to preclude the seller from negotiating with other potential buyers during a specified period of time
2.      Cons:
a)     The major disadvantage is that unless carefully drafted such instruments may create binding, enforceable obligations
 
C.      Agreement to Agree v. Agreement to Negotiate
1.      An agreement to agree = NO K
a)     Not enforceable because we are missing essential term
2.      Agreement to negotiate = K
a)     Is enforceable
b)     Purpose is to negotiate; merely to talk
c)      Essential terms:
(1) Subject, parties, time
(2) What is it that they are agreeing to do
d)     May contain a time to negotiate, list the items still needed to be negotiated, price of time periods, etc.
3.      Copeland v. Baskin Robbins
a)     Facts: Copeland negotiated with Baskin Robbins to purchase a plant that they were closing. Copeland claimed that the Baskin Robbins breached the letter of intent by refusing without excuse to continue negotiations.
b)     Holding:
(1) There is an implied covenant of good faith and fair dealings in contract negotiations. If the parties negotiate but fail to agree the agreement is deemed fulfilled.
(a) Covenant of good faith is not to make up terms such as price, it is to enforce fair dealings
(2)A contract to negotiate is NOT an agreement to agree
(3) If there is a contract to negotiate the covenant applies, but only reliance damages can be recovered. Failure to agree is not a breach of the contract. A party is only liable if the failure to reach the ultimate agreement resulted from a breach of that party’s obligation to negotiate or to negotiate in good faith.
c)      RULES:
(1) The fact that parties have commenced negotiations in anticipation of executing or amending a K does NOT itself impose any duty on either to negotiate the K or mediate in good faith
(a) i.e. in such a scenario there is no implied obligation not to be unreasonable in the K negotiations or not to break off negotiations (for any reason or no reason at all)
(2)Failure to agree is not itself a breach of K to negotiate. A party will be liable 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.
 
D.     Implied Covenant of Good Faith and Fair Dealing
1.      RULE: every K has an implied covenant of Good Faith and Fair Dealings
a)     Covenant is non-negotiable between parties
b)     Implied only to supplement the express contractual terms
2.      Define: that neither party will do anything to deprive the other of entering/dealing into a K (f the benfit of his or her bargain)
3.      Problem: it is subjective and thus difficult to tell if being breached
4.      Racine & Laramie, LTD v. Dept. of Parks and Recreation (1992)
a)     Facts: negotiation to modify a contract to allow a concessionaire to change his business form a cigar and wine tasting to a full scale restaurant. The land on which the business operated was owned by the state. Racine believed that due to the length of negotiations a tentative agreement result whi