• Don't Let "Non-Binding" Agreements Actually Bind You
  • March 29, 2018 | Author: Richard S. Guy
  • Law Firm: Vandeventer Black LLP - Norfolk Office
  • More often than I like, my first contact with a prospective borrower from a bank is when I am e-mailed a copy of a signed commitment letter. In some cases, that commitment letter was preceded by a term sheet that I also didn’t see. Similarly, often my first contact with the buyer or seller of a business is when I am sent a copy of a signed “non-binding” letter of intent. In most instances, I will see something in the document that I wish I could have changed—and might have, if I had been involved in the process earlier.

    Notwithstanding the language about some or all of the provisions of such letters being “non-binding” or “not giving rise to any legally binding obligation on the part of any of the parties,” the provisions of an approved term sheet or signed letter of intent or commitment establish the expectational outline within which definitive transactional documents or loan documents must live, and any later attempts to go outside that outline likely will be met with resistance by the other party.

    For example, if you have been approached to sell your business and have strong feelings about the maximum length of time that you are willing for your representations and warranties (and the related indemnities) to survive closing, or the minimum amount of cash you want to receive at closing, or the maximum amount of proceeds you want to put in escrow, it is critically important to include those issues in the term sheet rather than 10 drafts into the negotiations of an asset purchase or stock purchase agreement. Likewise, if you object to confession of judgment provisions, you should have the commitment letter say that there will be no such provisions in the loan documents. The lender may be unwilling, but at least you get the option to give up your wish or to search for another lender before your attorney has spent much time and your money negotiating documents that you will never sign. These are just a few of the items that should be addressed up front in a term sheet.

    Since it is likely that your attorney sees more loans and more deals than you do, I would argue that you should get him or her involved as early as possible in the process. Because of his or her experiences, your attorney may focus on some aspect of the deal or loan that you haven’t. For example, you may be ready to sign a commitment letter to sell your business before you have thought to ask the proposed buyer to sign a non-disclosure agreement. Again, that is only one example.