Surprise! Your Letter of Intent is a Purchase Contract

Under Ohio law, when is a letter of intent to purchase real estate not a letter of intent?

When it’s an unconditional real estate purchase agreement with all the terms needed for a binding contract. That’s what the Franklin County, Ohio Court of Appeals ruled in Quitifan v. Shafiq.

Jamal’s company leased and managed a gas station and convenience store. When the landlord went into receivership, Jamal and his father Khalil approached a gasoline distributor called R&R. If R&R would buy the gas station from the receiver, Jamal and Khalil would then buy it from R&R.

R&R drafted an intent to purchase letter with Khalil, that began “This is a letter of intent to purchase the business known as Fuel America, 2676 Cleveland Ave, Columbus, Ohio.” But the intent to purchase letter never stated that R&R and Khalil intended to negotiate a more final agreement, or that their obligations were conditioned on anything except R&R purchasing the property from the receiver.

Khalil was to pay R&R $270,000, plus all of R&R’s costs to bring the property into compliance with storage tank regulations, any other reasonable costs involved in R&R buying the property, and a profit of $25,000 to R&R. Khalil’s $5,000 deposit was non-refundable unless R&R failed, for any reason, to purchase the property. Closing was to occur within 30 days after R&R bought the property. At closing, the buyer would be required to sign a fuel supply agreement with R&R.

Khalil and R&R disagreed about what happened next, but they agreed that R&R eventually bought the property and refused to sell it to Jamal and Khalil. At some point after buying the property, R&R locked Jamal’s company out over a lease dispute and leased the gas business to someone else. Jamal and Khalil sued to enforce the intent to purchase letter.

The Franklin County Common Pleas Court entered summary judgment for R&R, reasoning that the intent to purchase was not a contract to purchase real property; at most it was an expression of intent to negotiate a contract in the future. The letter did not refer to any real property, only to the business. R&R did not own the real property when the parties signed the intent to purchase letter. The court also found that the purchase price was too vague.

The court of appeals disagreed, and sent the case back to the common pleas court for trial. The intent to purchase letter was clear enough to enforce. The agreement included the street address of the gas station, and referred several times to “this property” or “the property.” There was never any dispute regarding what land the agreement was referring to. The intent to purchase letter did not indicate that the parties meant to enter a further agreement.  Under Ohio law, an agreement to purchase real estate can be enforceable even if the seller does not own the land at the date of contract, if the seller is in a position to carry out the contract.

Finally, the court of appeals noted that a purchase price can be specific even if it includes terms like “all costs” or “all reasonable costs.” Those terms, in the court’s words, are not “so indefinite and uncertain that one party may charge what he will while the other party must guess at his obligation.” Instead, the formula was reasonably descriptive, and the parties were required to be reasonable in determining what costs were included.

Keeping It Real.

Like drafting purchase agreements, drafting letters of intent is no job for amateurs. The Franklin County Court of Appeals quotes the entire intent to purchase letter in its decision. It appears that the parties meant the letter to be binding. A lawyer could have made that intent clearer, saving the parties the cost of trial and appeal. If the parties had truly wanted a letter of intent, a lawyer could have included language to make the intent to purchase non-binding. The parties apparently tried to save on legal fees by drafting the documents themselves and ended up with an expensive lawsuit instead.

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