Daily Development for Thursday, November 1, 2001

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

The Reporter for today's DD is Jack Murray of First American Title in Chicago.

LANDLORD/TENANT; LETTERS OF INTENT; DUTY OF GOOD FAITH: Court suggests that a letter of intent agreement relating to a lease must meet the standards of specificity of the lease itself.

Officemax, Inc., v. Sapp, 132 F.Supp.2d 1079 (M.D. Ga. 2001).

Officemax approached Sapp regarding the possibility of leasing a portion of Sapp's property for a retail store. The parties entered into a letter of intent ("LOI"), which anticipated a 15-year lease, with options, and stated the size of the premises would be 23,500 square feet. The exact location of the space was not set forth in the LOI, although a proposed site plan was attached.

The LOI also contained a "non--shop" clause, which stated that Sapp would not entertain any other offers for the space or enter into any agreements with a third party for the requested space (and would notify Officemax of any inquiries for the space from third parties). Sapp, however, in a sneaky move, began to negotiate with Staples (a competitor of Officemax) for the same space, and ultimately signed a lease agreement for the space with Staples.

Unsurprisingly, Officemax cried foul and sued Sapp under the theories of breach of contract and promissory estoppel. But surprisingly (at least at first blush), the federal District Court ruled in favor of Sapp. The court found that:

1) Although Georgia courts hold that an agreement to execute a lease may be enforceable despite the parties' failure to sign an actual lease, in this case the agreement was not enforceable because the parties had not agreed on "all of the essential terms and conditions of the lease." In support of this holding, the court noted that there was "no mention of the restrictions that [Officemax] sought to have placed on the surrounding property" -- which restrictions apparently were the subject of intense negotiations subsequent to execution of the LOI..

2) The non-shop clause was indefinite and lacking in mutuality or bargained-for consideration, and therefore could not be enforced against Sapp. The court found that any alleged "forbearance" by Officemax was illusory because the non-shop clause contained no explicit promise by Officemax not to view other properties, and in any event there were "no other appropriate sites in the [immediate geographical] area." The court also found that the non-shop clause was unenforceable because it did not specify a duration.

3) The LOI was unenforceable because it did not sufficiently describe the property or provide an adequate legal description. According to the court, "the letter of intent stated that the site was subject to review. Therefore the location was subject to change. This causes the description to be inadequate."

4) Officemax could not recover under a theory of promissory estoppel because "promissory estoppel is not available with respect to a promise that can be terminated at will."

Reporter's Comment 1: The moral: Avoid letters of intent if at all possible when entering into lease negotiations. If the parties nevertheless insist on an LOI, conduct an exhaustive review of the state's case law and statutes regarding LOI's. The LOI must be carefully, cautiously, and comprehensively drafted to prevent any "opening" that would give a court a "hook" to find it unenforceable. The Officemax case should serve as a cautionary tale for real estate counsel in this regard.

Reporter's Comment 2: The court in Officemax prefaced its holding by citing an 11th Circuit decision that applied Georgia law, Doll v. Grand Union Co., 925 F.2d 1363, 1368 (11th Cir. 1991). In the Doll case , the court stated that "[a]s long as the court can extract the essential terms of the lease from the contract to sign the lease, the contract will be enforced." Notwithstanding this prefatory statement of the applicable law, the court in Officemax proceeded to find the LOI unenforceable, even though Sapp virtually thumbed its nose at Officemax with respect to the intent of the non-shop clause in the LOI.

Editor's Comment 1: Surprisingly (to the editor), the editor has completely the reverse reaction to this case. There should be room in our commercial system for parties to reduce to writing their understanding of how things might go, should they commit to a deal, without in any way committing themselves to a deal. Courts should permit the parties to carve out a "safe harbor" within which no special duties accrue.

The editor agrees that the parties may have gone beyond the creation of such a "safe harbor" here, since they purported to limit the marketing options of the landlord. But if the parties elect to do such things, then we should not regard them as working in the "never never land" of pure negotiation, and we should hold them to ordinary standards for binding contracts, including requirements for clarity and consideration.

Otherwise, absent some sort of estoppel argument, they deserve no legal remedy.

Editor's Comment 2: The editor does agree, however, that the contract that the parties may be viewed as entering into may not be a lease. Such agreements may be preliminary to a lease, and limit the marketing or shopping options of the parties, but need not satisfy all the requirements for a binding lease. To the extent that the Georgia court held Officemax to the standard of establishing a binding lease here, the editor concurs that it was a bad decision.

Editor's Comment 3: There was no showing of adequacy of consideration because Officemax made no promise to forego looking for other properties. Officemax, in this case, is arguing that it did make such a promise implicitly. The editor suggests that in the next case Officemax could regret mightily that it supported the notion that courts can identify and impose unstated obligations on parties involved in bargaining based upon letters of intent.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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