Real Estate, Zoning, and Land Use
- November 2011 – Taking Land for Economic Development
- December 2010 – New RESPA Provisions adopted to Aid Consumers
- January 2010 – Religious Land Use Lawsuits
- November 2008 – Landowner Gets Settlement For “Taking”
- July 2008 – Like Kind Exchanges
- April 2008 – Pennsylvania Realty Transfer Tax Update – Assignment Of Contract
- April 2005 – Final Rules on Capital Gains
- April 2005 – Town Cannot Zone Out Synagogues
- April 2005 – Handicapped Accessible Apartments
- September 2004 – Real Estate Letters Of Intent
A city negotiated with property owners to acquire a strip of land and some temporary easements for the purpose of installing a deceleration lane for traffic that would access a new development. Included in that development was a building to be occupied by a wellknown national retailer of consumer goods. After initial negotiations to acquire the real property failed, the city filed a petition in state court to condemn the property.
The owner of the property subject to being taken tried to capitalize on the fact that the state legislature had recently subjected the power of eminent domain to a new additional limitation. In 2006, after the U.S. Supreme Court had determined in a controversial ruling that the transfer of land to a third party for the purpose of furthering a city’s economic development plan was a sufficiently public use to permit the constitutional exercise of eminent domain, the legislature passed a new law to prohibit the use of eminent domain “if the taking is primarily for an economic development purpose.”
The property owner argued that the deceleration lane primarily served the economic development purpose of providing vehicles access to the nearby retailer. He reasoned further that the addition of the deceleration lane would ultimately cause the expansion of the city’s property and sales tax bases by providing the retailer’s customers easier access to the retailer’s parking lot.
A state appellate court upheld the taking. Although the collateral consequences of the addition of a deceleration lane might include some enhancement to economic development, the primary purpose of the new lane clearly was the same as for any other road project— simply to promote traffic safety and the efficient flow of traffic on the city’s streets. The court acknowledged that many permissible uses of eminent domain provide collateral benefits to private industry. When land is acquired by eminent domain for a public building, such as a school, nearby convenience stores or restaurants may also benefit. Using eminent domain to install utilities likewise can be beneficial to surrounding businesses. There are countless other instances where the exercise of eminent domain indirectly enhances economic development, but such situations do not come within the newly enacted prohibitions on the use of condemnation by the government, because such takings do not have as their primary purpose the stimulation of economic development.
Four reasons offered by the court for upholding the condemnation provide some criteria for gauging whether any other such challenges by property owners have a chance of succeeding on a similar theory: First, the city did not take the property primarily for the “use” of a commercial enterprise in any traditional sense. The city will be the owner of title to the land, and the primary users will be members of the public at large.
Second, the city’s acquisition of the real property did not serve the primary purpose of increasing tax revenue because the actual land acquired will not contain any entity that will generate sales or property taxes.
Third, the city’s acquisition of the land was not primarily serving the purpose of increasing employment. Construction of the deceleration lane will require the temporary use of labor, but the purpose of a deceleration lane is unrelated to the creation of additional jobs, as opposed to traffic control.
Finally, the use of the property cannot be construed as primarily related to general economic conditions, because there was no evidence that this affected the city’s determination to exercise its eminent domain powers. The decision making body, the city’s engineering department, acquired the property at issue to allow traffic to proceed in an orderly and efficient fashion and to limit the potential collisions as a result of cars decelerating on the right of way. There also was no evidence that the nearby retailer in some way used economic pressure to convince the city to install the deceleration lane.
Allentown has used eminent domain to acquire a few of the properties for its proposed arena and has used the threat of eminent domain to acquire many other properties. So far there have not been any challenges to the use of eminent domain in that project.
Our attorneys have represented a number of property owners and businesses affected by eminent domain. Contact us if you need representation to deal with condemnation or threaten condemnation impacting your property or business.
The federal Real Estate Settlement Procedures Act (RESPA) is a consumer protection law for homebuyers that is enforced by the Department of Housing and Urban Development (HUD). For most people its primary impact involves the settlement statement for the purchase or refinance of a home. The thrust of the law is to require that loan originators make certain disclosures to borrowers so that they can be more informed consumers, and give more transparency to the transactions. HUD recently wrote new regulations requiring that borrowers receive both a standard Good Faith Estimate (GFE) that discloses key loan terms and closing costs and a new “HUD1” settlement statement.
The format of the new GFE is supposed to simplify the process of originating mortgages by consolidating costs into a few major cost categories. The former GFE had a long list of individual charges. The new version includes this list, but also has a summary page containing the key information for comparison shopping by the consumer.
The new GFE also has a set of tolerances on originator and third-party costs. Originators must adhere to their own origination fees and give estimates subject to a 10% upper limit on the sum of certain third-party fees. The idea is to encourage loan originators to seek out lower costs for third-party services, to the benefit of borrowers.
The main changes in the HUD1 settlement statement involve new language and the organization of charges that are intended to make it easier to compare the GFE and the settlement statement, in order to confirm whether the tolerances in the new GFE have been exceeded. It is intended to make it easier for the consumer to verify that the loan terms summarized on the GFE match those in the loan documents, including the mortgage note.
For many, understanding the HUD-1 settlement statement is a challenge; let alone making sense out of the new GFE provisions.
Reaction to the new regulations has been mixed, with some consumers complaining about their complexity and vagueness and other consumers wondering if the regulations will, in fact, serve to enhance protection for consumers. Since the forms provide for lumping lenders’ fees together rather than detailed itemization, some consumers think that lumping the fees together could make it harder to detect questionable charges.
In any event, the “bait and switch” tactic in which artificially low estimates of costs mysteriously balloon at closing has been addressed by HUD. Now a lender is largely tied to its goodfaith estimates provided for such mortgage fees as points, origination costs, and appraisals.
Through our affiliated title company Omega Abstract Co., we offer a full range of title services for purchases and refinances, including title insurance underwritten by Commonwealth Land Title Insurance Company. Contact us to learn how we can help you with your next real estate closing and help you understand the process, all of the forms and documents.
The land‑use portion of the federal Religious Land Use and Institutionalized Persons Act (RLUIPA) was enacted to prevent discrimination by the government against the use of real property by religious organizations. On its face, the wording of the statute may appear to apply to circumstances that arise infrequently, but many churches and other religious institutions have used the RLUIPA to get their way in zoning standoffs with local governments.
The RLUIPA prohibits the government from imposing or implementing a land‑use regulation in a manner that imposes a “substantial” burden on the religious exercise of a person, including a religious assembly or institution, unless the government demonstrates that imposition of the burden is in furtherance of a compelling governmental interest and is the least restrictive means of furthering that interest. Thus, a complaining party has the considerable initial burden of showing that the land‑use regulation substantially burdens the exercise of religion, and is not merely expensive or inconvenient. If that hurdle is crossed, however, the government may well have a difficult time showing both the “compelling” governmental interest and that it has selected the least restrictive means to advance that interest.
In one RLUIPA case, a village zoning board violated the RLUIPA when it denied an application for a special‑use permit allowing a private religious day school to construct a classroom building on its campus. The expansion project was a building on, and conversion of, real property for the purpose of a religious exercise, within the meaning of the RLUIPA, given that the rooms that were planned and the facilities to be renovated would all be used, at least in part, for religious education and practices.
Even while ignoring a substantial burden imposed on the school’s religious exercise, the zoning board did not act to further any compelling state interest, as was shown by the lack of evidence for its stated reasons for denying the permit. Instead, the board had acted with undue deference to the opposition of a small group of neighbors. Even if some compelling state interest was involved, the board refused to consider approving the application subject to conditions, and thus had not used the least restrictive means available to it.
Of course, religious organizations have not batted a thousand when they have invoked the RLUIPA. Sometimes even similar cases have had opposite outcomes, making any predictions difficult. In another case of a growing church that had plans to expand the church facilities, including a school on its property, a federal appellate court upheld a township’s decision to deny the church’s application for a special‑use permit. The court found that the township’s denial of the church’s application to build a structure in excess of 25,000 square feet on its property did not impose a substantial burden on the church’s religious exercise, so as to violate the RLUIPA.
The denial would require the church to incur increased expense to accomplish its goal of building a significantly larger church and school, and to endure increased inconvenience if it were not able to build a facility of the desired size, but, in the court’s view, nothing the township had done required the church to violate, modify, or forgo its religious beliefs or precepts, or to choose between those beliefs and a benefit to which the church was entitled. That the church was still free to carry out all of its missions and ministries, just not on the scale it desired, foreclosed any finding of a “substantial” burden.
We have substantial experience in handling numerous types of land use matters, including approvals for religious institutions. Please contact us to learn more about how we can assist you in land use and zoning matters.
When the government takes aim at private property to be taken for some public purpose, more often than not any resulting litigation is a contest over how much the property owner should be paid, rather than whether the exercise of the power of eminent domain was appropriate in the first place.
From the landowner’s standpoint, it is important to realize that adequate compensation is not determined simply on the basis of the current use of the property. Instead, the landowner is entitled to the value of the property based on its “highest and best” use (whether that use already exists or is only in the eye of a developer), so long as such a potential use is not too speculative or otherwise foreclosed by applicable laws and regulations.
The importance to a property owner of negotiating compensation on the basis of a best‑case, but realistic, development scenario for the property is illustrated by a recent case in which the owner of a vacant, 22,000‑square‑foot lot settled with a town for compensation in an amount that was about 27 times higher than the amount initially offered by the town.
The lot was zoned for residential use, although at the time of the condemnation action the owner had no building or development plans. Appraisers hired by the town offered an opinion that the vacant lot’s best use was only as open space, or as a buffer for an abutting lot. They reasoned that compliance with the town’s lot area and frontage requirements, as well as with its road standards for improving the dirt road on which the lot was located, would be so burdensome as to make any development of the property prohibitively expensive. They also indicated that extensive development costs would preclude development even if the lot was considered to have grandfathered status that would protect it from certain town requirements.
For its part, the landowner retained experts who opined that the lot was, in fact, suitable for residential purposes and should be valued as such when arriving at a compensation figure for the taking. As the town’s experts had noted, there were various requirements on the books that, in theory, could be costly to comply with. However, an examination of past rulings by the town’s zoning and conservation officials showed that the lot was likely to be exempted from some of the requirements. Moreover, improvement of the dirt road, which would have been an especially big‑ticket item, was not likely to be required.
Both sides were necessarily looking into the future to some extent, but the landowner was able to depict a scenario for the lot that was optimistic enough to bring about a favorable monetary settlement with the town.
The use of the development approach to valuation depends on a number of fact specific factors. Contact Us for more information about how this valuation approach may benefit you in a condemnation or a “de facto” condemnation.
Normally, capital gains are recognized and taxable upon the sale of property. The Tax Code provides an exception to this rule for certain exchanges of property. If all requirements are met, any gain from the exchange is not currently taxed, and any loss cannot be deducted. Gains or losses will not be recognized until the person who received property in the exchange sells or otherwise disposes of it. The most common type of nontaxable exchange is the exchange of property for the same kind of property, or like‑kind exchanges.
To qualify as a like‑kind exchange, the property traded and the property received must be both (1) qualifying property and (2) like property. Qualifying property must be held either for investment or for productive use in a trade or business. Typical examples include machinery, buildings, land, trucks, and rental houses. Like property refers to the nature or character of the property. Characteristics relating to the grade or quality of the property are immaterial. All real estate is like‑kind to all other real estate, whether or not one or both of the properties are improved. Similarly, an exchange of personal property for similar personal property is an exchange of like property.
Because a straight swap of property is often impractical, the Tax Code allows deferred like‑kind exchanges. If the transaction is structured properly, a person can sell one property, have the proceeds held for a period of time, and then use the proceeds to buy new property. The seller must identify the replacement property within 45 days of selling the relinquished property. Also, acquisition of the replacement property must take place within 180 days of the sale of the relinquished property, or the due date of the taxpayer’s return for that year, whichever is earlier.
It is common to use a qualified intermediary in making a deferred exchange of like property. A qualified intermediary is a person who enters into a written exchange agreement to acquire one party’s property and transfer it to a second party, and also to acquire replacement property from the second party and transfer it to the first party. The agreement must explicitly limit the first party’s rights to obtain in any way the benefits of money or other property held by the intermediary. A qualified intermediary cannot be either an agent or a relative of the “exchanger.”
There are special rules for like‑kind exchanges between related persons. In this context, “related persons” include not only spouses, siblings, parents, and children, but also a corporation in which an individual has more than 50% ownership, and a partnership in which an individual owns over 50% of the capital or profits. For a like‑kind exchange between related persons, the ability to postpone tax liability for the gain from the exchange is lost if either person disposes of the property within two years after the exchange.
An exchange of like‑kind property is only partially nontaxable if the taxpayer also receives money or unlike property in an exchange that produces a capital gain. In that case, the gain is taxable, but only to the extent of the money received and the fair market value of the unlike property.
Factors to Consider
In general, three basic factors may be considered in deciding whether a like‑kind exchange will make sense. The exchanger should (1) receive property with a price equal to or greater than that of the relinquished property; (2) have as much, or more, debt in the acquired property as in the property given up; and (3) take no cash out of the transaction.
The rules regarding like kind exchanges can be complex and are required to be strictly followed. The failure to meet all of the requirements will cause the transaction not to qualify as a like kind exchange and be currently taxable. Although a like kind exchange may be able to effectuated at any time prior to sale of the property, for the best results the exchange should be planned before entering into the agreement to sell the property.
Contact Us to discuss how a like kind exchange may benefit you.
The Pennsylvania Department of Revenue has recently taken several steps to collect more transfer taxes on real estate transactions.
The Department has taken a controversial position regarding taxability of assignments of agreements of sale for Realty Transfer Tax purposes. It is now the Department’s position that transfer tax is due on the execution or recording of a deed based on (1) the value of the original contract as well as (2) the value of the assignment contract, as though the assignment and the sale were two separate transactions.
Pennsylvania Realty transfer tax is a documentary stamp tax imposed on the value of real property transferred by deed or other instrument. Typically the tax due on recording of a deed. The tax is based on the value of the transferred property. The rate is 1% to the state and 1% to the local authority, although some areas have a larger local rate. The Buyer and Seller are jointly liable for the tax; typically the tax is equally divided by the Buyer and Seller.
The Department’s position is contained in updated Realty Transfer Tax regulations published in December 2007. (61 Pa Code §91.170). In furtherance of the regulations the Department issued Realty Transfer Tax Bulletin 2008 – 01 on January 3, 2008 explaining the Department’s position of the rule in set forth by the Courts in the Baehr Bros. decision.
The essence of the department’s position is that substance of a transaction takes precedence over its technical form to determine tax consequences for Realty Transfer Tax purposes. Put into transactional terms, just because there is only one deed does not mean that there is only one transfer tax due! (and here, Pennsylvania wants two taxes)
For example assume X enters into an agreement of sale with Y for $100,000 and Y thereafter assigns its rights in the contract to Z for $50,000 so that Z will have paid $50,000 to Y to acquire its rights plus assuming Y’s obligations to pay X $100,000. The Department of Revenue now claims that Realty Transfer Tax is due on the recording of the deed from X to Z for both $100,000 (X to Y transaction) and $150, 000 (Y to Z transaction).
It should be noted that the Department’s first attempt to challenge assignments was the claim that the value on which the Realty Transfer Tax is to be based should be the final amount paid by the ultimate buyer (namely that the value was the total amount paid by the Buyer to the Seller and each assignor). In Allebach v. Comm, 643 A.2d 625 (Pa. 1996) the Pennsylvania Supreme Court rejected the Department’s attempt revalue the transaction to the amount paid by the buyer rather than the amount received by the seller where there were interim assignments of the real estate contract.
Having lost that argument, the Department is now trying to claim that the substance of the transaction is the same as though each person in the assignment had taken the title to the property and then conveyed the property to the final buyer. In our example, the Department lost the ability to tax the transaction at the value paid by Z ($150,000) and now wants to tax first the original purchase agreement price of $100,000 and then also tax the final sale for $150,000. The Department claims its position is in conformity with the court decision in Allebach by finding that the assignment is a separate transaction subject to Realty Transfer Tax. The Department’s rationale is that pursuant to Baehr Bros. the Department may view the transactions as two separate transactions and therefore it is seeking only to collect tax based on the $100,000 from X and Y and that the additional tax is based on a second transaction between Y and Z (without giving Y credit for the taxes paid in the X&Y transaction), even though the ultimate Buyer Z only pays $100,000 to the original seller X.
It is likely that the Department’s position will be challenged by taxpayers in the future. In the interim, taxpayers need to be guided by the existence of the regulations and proceed accordingly.
In what many view as an even more controversial position, the January 2008 tax bulletin sets forth the position that this rule (taxing both the sale and the assignment separately) would also apply in a situation where one of the “assignment” was to an affiliated entity for no additional consideration. For example, an “assignment” of an agreement of sale to a newly formed affiliated LLC or limited partnership or other single purpose entity formed for the purpose of the purchase AFTER the deal was already made and passed due diligence.
The Department’s pronouncement contains an example in which a prospective purchaser enters into an agreement of sale in its own name (an individually or as an entity) and at some time prior to Closing the buyer determines that title to the property should be taken into a new entity (typically after consulting with a lawyer AFTER entering into the Agreement of Sale), often a newly created LLC, which may not even be a separate taxpayer for income tax purposes.
Realty Transfer Tax Bulletin 2008-1 provides that unless the documentation of the transaction makes it clear that the individual (or original purchaser in the Agreement of Sale) was merely acting as a broker or agent for the entity to be created there is a rebuttable presumption that an agent or straw party relationship did not exist.
Where no documentation exists in either the agreement of sale or the Deed, Bulletin 2008-1 advises that the Department’s position will be to treat the transaction as 2 separate transactions, the first between the seller and the buyer under the agreement of sale taxed at the amount of the sale price and the second transaction being a transfer of the property from the individual to the LLC or other wholly-owned entity (or from one affiliated entity to another entity), which is treated as a taxable transaction and taxed at the computed value (the value determined based on the assessed value since the transaction is not at arms length). Informally the Department has advised that it will not seek tax where the original agreement of sale is terminated and a new agreement with the new entity as buyer is signed.
The third instance in which the ruling makes clear that the department intends to assess transfer tax where many practitioners and taxpayers do not believe liability for Realty Transfer Tax would exist is with respect to 1031 ( like kind) exchanges. The form of 1031 exchange in which the Department views that an additional realty transfer tax would be due is where title to the real estate is transferred to a qualified intermediary rather then title being transferred directly from seller to purchaser with an assignment of the sale proceeds to the qualified intermediary and a qualified intermediary then using the sale proceeds to complete the purchase on the buyer’s behalf. Interestingly enough, the Department is not seeking to assess tax where an agreement of sale may have been entered into and the contract of sale (without a title transfer) being assigned to the qualified intermediary. Whether this is, in fact, the Department’s position or whether the Department may not fully may not have fully taken into account all of the nuances of like kind exchanges will have to await further interpretation from the Department of Revenue.
In the interim, taxpayers should also be cautious with respect to like kind exchanges of Pennsylvania real estate.
For more information about these issues, other Pennsylvania Realty Transfer tax matters or Pennsylvania real estate matters in general, please contact our office in the advance of entering into any contracts.
The Internal Revenue Service has issued its final rules on the capital gains tax exclusion that is available on the sale of a taxpayer’s principal residence. A taxpayer may exclude up to $250,000 from the sale of a principal residence, and the exclusion doubles to $500,000 for married taxpayers. However, the taxpayer must have owned and used the property as a principal residence for a total of at least two of the five years before the residence is sold.
The final rules focus on the part of the Internal Revenue Code that allows a taxpayer who fails to meet the above condition to still have an exclusion in a reduced amount. There are three grounds for claiming a reduced exclusion: change in employment, health, and unforeseen circumstances. For each of these grounds, the regulations provide a general definition and one or more “safe harbors”‑‑specific reasons for the sale of the residence. If the safe harbor for a particular ground applies, a sale (or exchange) is deemed to be “by reason of” that ground. If no safe harbor applies, the taxpayer still can claim one of the grounds on the basis of all of the surrounding facts and circumstances.
For example, the safe harbor for claiming a reduced exclusion because of a change in employment applies when the new place of employment is at least 50 miles farther from the residence that was sold than was the former place of employment. As for health, the safe harbor that smooths the way for the reduced exclusion is a physician’s recommendation of a change of residence for reasons of health. A sale or exchange of a residence due to unforeseen circumstances refers to the occurrence of an event that the taxpayer could not reasonably have anticipated before purchasing and occupying the residence. Simply wanting to move to a preferred home or moving due to improved financial circumstances does not qualify. The specific events that make up the safe harbor for this ground include, among other things, such circumstances as death, divorce, natural or man‑made disasters affecting the house, and even multiple births from a single pregnancy.
Two small Jewish congregations leased second‑floor space in a bank building in the business district of a small town. Under the town’s zoning ordinance, churches and synagogues were allowed in only one of the town’s eight zoning districts. Unfortunately for the congregations, their location was not in that district. When the town tried to direct the congregations out of the business district and into the one district where synagogues were allowed, the worshipers objected. They maintained that there was no suitable location in that district and that such a move was not practical or convenient for the many members who had to walk to services.
When the dispute eventually reached federal court, the congregations ultimately prevailed on a claim brought under the federal Religious Land Use and Institutionalized Persons Act (RLUIPA). Essentially, that law prohibits a governmental entity from implementing a land‑use regulation in a manner that treats a religious assembly or institution less favorably than a nonreligious assembly or institution. The town’s ordinance ran afoul of the RLUIPA because it permitted private clubs, social clubs, and lodges in the same business district in which it banned churches and synagogues.
The town argued that it was reasonable to keep houses of worship out of the business district because they eroded the tax base and reduced the vitality of the retail areas. The court agreed with the congregations’ response that the places of worship were no more of a drag on business than the clubs and lodges that were allowed in the business district. In fact, there was evidence that members of the congregations regularly stimulated the local economy as they patronized shops on the way to and from the synagogues. There was no comparable stimulus from members of private clubs, who gathered less often and sometimes during nonbusiness hours. All that was left to explain the town’s treatment of the congregations, as compared to the town’s treatment of the congregations’ secular counterparts, was the religious nature of their activities. It was just such discrimination that Congress meant to prohibit when it enacted the RLUIPA.
In its role as enforcer of the Fair Housing Act (FHA), the U.S. Department of Justice sued the developer of, and architects for, two apartment complexes. The government won an injunction against any further construction and occupancy of the apartment buildings.
Among the detailed requirements in the FHA for accessibility for the disabled is a requirement that “common areas” for multifamily dwellings be readily accessible to and usable by handicapped persons. In the case under consideration, the focus was on the landing area shared by two ground‑floor apartments in each complex. The front door for each of the apartments was located there, but it was not handicapped accessible because the landing could only be reached by descending stairs. The apartments also had a rear entrance from the apartments’ patios that was handicapped accessible, but it was located farther from the parking lot.
The defendants argued that the FHA only requires that there be at least one accessible route into and out of each apartment, and that the patio entrance for each ground‑floor unit met that requirement. The federal court disagreed. All it took to make the landing area a “common area” was that it was shared by at least two units, and that was so in the case before the court. It was beside the point that there was a separate, back‑door access for the disabled. The FHA clearly mandates that the common area, which in this case was at the front‑door entrance to the apartments, be handicapped accessible.
The court indicated that the public’s strong interest in eradicating housing discrimination against the disabled outweighed the developer’s plea that the injunction translated into substantial financial losses each month. The government also pointed out that the developer chose to proceed at its own peril with construction and leasing after being warned that the design violated the FHA. This case offers an object lesson in the importance of being in compliance with FHA requirements before breaking ground on a construction project.
A letter of intent (LOI) reduces to writing a preliminary understanding of parties who intend to enter into a contract, including contracts to purchase real property. The concept falls somewhere on the continuum between the first informal talk about a possible deal and a binding written agreement covering all of the essential terms. By its nature, an LOI does not bind the parties to the transaction, raising the question as to how it can still be useful. An LOI is evidence of some commitment, albeit more moral than legal, to the deal. A potential buyer with an LOI in hand has an edge over others who may have an eye on the property. Having laid a foundation on which a deal could be built, the buyer and the seller can feel more comfortable about putting in the effort, energy, and money that may be necessary to actually close the deal.
LOIs have potential drawbacks and should not be entered into without advice of counsel. First, if an LOI is produced only after extensive proposals and counter‑proposals, or if it becomes stuffed with details you would normally expect to find in the fine print of a contract, it may be more trouble than a nonbinding document is worth. All of that work is better saved for the “main event.”
Second, while it may be appropriate and even desirable to describe the key terms of the subsequent contract in the LOI, it must be made very clear that the terms are not yet binding. In fact, an LOI should state generally that the parties do not intend to be legally bound to consummate any transaction until they have signed and delivered a written agreement in which they agree to be bound. It helps in this regard to avoid using boilerplate contract terms like “agree,” “offer,” and “accept” in an LOI. Language to the effect that an agreement is subject to formal documentation may be helpful, but by itself it may not rule out a conclusion that the parties intended to be bound. Similarly, while it may not settle the issue, calling the document a “letter of intent” implies a nonbinding expression in contemplation of a future contract.
In an LOI, the buyer and the seller may need to bind themselves to certain preliminary matters leading up to the contract, however, such as access to the property for inspections. In that case, it is essential to distinguish clearly between nonbinding and binding items in the LOI. Even when the language of the LOI is in good order, a party to the LOI should take care to avoid conduct or statements that are at odds with the LOI’s preliminary nature. Otherwise, the other party may attempt to argue, in effect, that actions speak louder than even written words, and that both parties meant to be, and are, bound by everything in the LOI.
In a recent case, a court ruled that a “letter offer” sent by a developer and signed by the owner of undeveloped land was not a binding agreement. The factors that led to the decision are instructive. The language in the letter stating that it “will serve to set forth some of the parameters for an offer” suggested the setting of negotiating boundaries, rather than final terms. The letter expressly anticipated that a contract of purchase and sale would be executed later.
It was also significant that several key obligations and events concerning the expected sale, such as the beginning of an inspection period, were to be triggered only by the execution of a contract, not by the offer itself. Finally, the letter offer omitted some terms one would expect to find in a multimillion‑dollar contract for the sale of property, such as a closing date, warranties, conveyance provisions, responsibility for taxes, and how the parties were to notify each other of contractually significant events.