Frequently, prior to executing a transaction – particularly in real estate–  the parties will negotiate a letter of intent (LOI). The LOI sets out the main terms of the contemplated final agreement and serves to ensure that both parties to the deal are of the same mind and understand the most significant terms of the agreement in the same way.

As an “agreement to agree” or “pre-contract”, LOIs are less formal than the ultimate definitive agreement. The LOI memorializes key terms of the contemplated transaction, giving both parties the comfort to proceed further. LOIs also allow the parties to tweak the deal early on, which is much easier than making changes later in the transaction.

In some instances, LOIs can even be binding. This is not the norm, however, and depends on local law and the manner in which the LOI is drafted. LOIs don’t contain many important terms that will be in the final contract, so parties generally don’t want to be bound by such an ambiguous document. In determining whether an LOI is binding, courts look to both the intent of the parties as written in the LOI, as well as subsequent actions taken by either party after the LOI has been drafted.

When parties disagree on the binding effect of the LOI, the more numerous and more specific the terms of an LOI, the more likely it is the LOI will be found binding by a court. Terms the parties may wish to be binding include confidentiality and no-shop clauses. In instances such as these, the parties should ensure the binding portions are explicitly stated to be binding so that question is not left to the courts.

In New Mexico, whether LOIs are binding depends on the intent of the parties prior to the transaction. LOIs can be binding in New Mexico when the terms of the LOI are “reasonably certain.” [1] A New Mexico court considers an LOI to be reasonably certain when it includes provisions defining what breach of contract would look like, as well as what the remedy for that breach.[2]  In terms of real estate, New Mexico’s statute of frauds also requires such a document to be signed in order to be binding. [3]

Parties may think if their LOI lacks key terms, such as price, it won’t be found binding in court. Courts in New Mexico, however, may find an LOI to be binding even if it lacks the price, for example, so long as the document provides for the negotiation of a “reasonable” price later in the process. [4] This is why it is so important to specify which clauses are to be binding or non-binding.

Bad LOIs, like many other poorly drafted documents, can lead to significant issues down the road. The cannabis industry has additional regulatory problems on top of general woes shared by all businesses, and there’s no need to make things worse. Getting your LOI right the first time will save you from even more legal problems in the future.