The Letter of Offer, sometimes referred to as a letter of intent, is a document typically drafted by the Vendor in a property transaction where the Purchaser expresses their interest to purchase the land for a certain price. Usually, the Purchaser pays a reservation fee, which is nominal compared to the deposit required under an Agreement for Sale.
A party that has signed a Letter of Offer may be legally bound to honor it, depending on how the letter is drafted. In conventional transactions, a Letter of Offer generally includes a provision stating that it is non-binding. Even without such a provision, a court might rule that the letter is merely an expression of intent.
Is a Letter of Offer a legally binding document? To answer this, it is essential to understand the different types of Letters of Offer that may exist.
The Conditional Letter of Offer
A Letter of Offer can be conditional, usually contingent on the Purchaser entering into a formal contract or Agreement for Sale. This type of offer letter implies an understanding to formalize the contract. If the Purchaser does not sign an Agreement for Sale by the specified deadline, the offer expires, the Vendor can accept other offers, and the Purchaser forfeits the reservation fee. Essentially, such a conditional offer letter is not binding.
The principle here is that an agreement to enter into a contract is not yet a binding contract. When many terms are not finalized and there is room for further negotiation, the law does not recognize it as a binding agreement. This was affirmed in Charles Grenier Sdn Bhd v. Lau Wing Hong [1997] 1 CLJ 625, where the Federal Court recognized that a contract to enter into a contract does not have binding effect.
Similarly, in East African Fine Spinners Limited (in receivership) & 3 Others vs. Bedi Investments Limited (1994) eKLR, Gicheru JA referred to Winn v. Bull (1877) 7 Ch D 29, noting that a proposal expressed to be subject to a formal contract means it is dependent on that formal contract being prepared and executed. This position was upheld in Kessel Homes Limited v John Kimotho Nginga & another [2021] eKLR as well as Mwago v Kings Pride Properties Limited (Civil Appeal E148 of 2022) [2023] KEHC 21733 (KLR) (Commercial and Tax) (29 August 2023) (Judgment).
In Keppel v. Wheeler & another (1927) 1 KB 577, it was held that accepting an offer subject to a contract means the matter remains under negotiation until formal contracts are exchanged. Therefore, Letters of Offer made subject to a formal contract or Agreement for Sale are not legally binding.
The Unconditional Letter of Offer
An unconditional Letter of Offer has no conditions attached. Once accepted, the Purchaser is bound to complete the purchase and cannot cancel the agreement for any reason. Similarly, the Vendor, upon signing the Letter of Offer, is obligated to sell the property to the Purchaser. Unless it explicitly states that it is non-binding, an unconditional Letter of Offer is a binding document.
The Courts have shown flexibility in analyzing the enforceability of Letters of Offer in property transactions, albeit rare. For example, in the Malaysian case of Syarikat Pertanian Emmal Sdn Bhd v. Tractors Malaysia (1982) Sdn Bhd [2009] 4 MLJ 223, the court considered whether a binding contract was formed when the Vendor accepted the Purchaser’s offer to buy land and requested a 5% earnest deposit. The Purchaser issued a letter of intent and enclosed the earnest deposit, leading to a dispute when the Vendor attempted to withdraw the accepted offer.
The court examined the pre-contract documents and found that the duly signed letter of acceptance, including all material terms, was sufficient to form a contract. The essential terms—parties, price, property—were all identified, and the intention to enter a contractual relationship was evidenced by the earnest deposit. Referencing Damon Cia Naviera SA v. Hapag-Lloyd International SA [1985] 1 All ER 475, the court noted that payment of a deposit is a term of the contract, not a condition precedent to the formation of contractual relations.
The conduct of both parties indicated an intention to enter into a binding agreement. Consequently, the High Court ruled in favor of the Purchaser, allowing specific performance of the agreement with costs.
Conclusion
In conclusion, the enforceability of a Letter of Offer in property transactions hinges on its content and the conduct of the parties involved. Courts will consider these factors to determine whether a binding agreement exists. Conditional Letters of Offer generally are not binding, while unconditional ones can be, unless explicitly stated otherwise. Understanding these nuances is crucial for both Vendors and Purchasers in navigating property transactions.
How we can help
At AGO Advocates LLP, we are committed to ensuring all our clients comply with all legal and regulatory requirements. In this regard, our services include structuring commercial and conveyancing transactions to conform to the intention of the parties as well as comply with the legal tenets that govern such transactions. Get in touch for any inquiry via (+254) 020-22 11122 /0100 211 122 or info@agoadvocates.com
AUTHORS
Silas Gitari
)
