In a previous post entitled “Watch Your LOIs and MOUs and ‘Agreements to Agree’,” we discussed that while LOI’s and MOU’s may be non-binding, they may nonetheless subject the parties to an obligation to negotiate in good faith.
While the obligation to negotiate in good faith is an issue that everyone should be sensitive to and aware of, non-binding LOI’s and MOU’s also serve to create an additional level of formality that establishes for the parties a slightly stronger, but loose, commitment that merely ongoing conversations do not establish. What they can also do is impose a “psychological” or “moral” obligation or commitment to attempt to negotiate a purchase agreement and abide by the terms set forth in the LOI or MOU. While signing a non-binding letter of intent may not obligate the parties legally, the parties may import significance to a written document, especially the key terms that are set forth in writing, and parties may be hesitant to terminate negotiations or walk from a deal without good reason out of concern that they may be breaking their “gentleperson’s agreement” set forth in the signed, but non-binding, LOI.
The LOI or MOU also sets the ground rules for negotiations and provides a road map for negotiating and drafting a final agreement.
In setting forth a definitive purchase price in an LOI or MOU on behalf of a seller, this locking in of the price puts a lot of pressure on the buyer to not change the price during negotiations unless there is new information that morally supports a change.
We typically take the position that changing a material term addressed in the LOI or MOU, while not necessarily bad faith, makes it more difficult, morally or otherwise, for the opposing side to raise.
So even though you can make your LOI legally non-binding, you still want to be careful what terms get into the LOI, because you may be stuck with them.