Kathrin McClintock
Associate
+44 (0)20 7826 4539

Melissa Moyle
Associate
+44 (0)20 7826 4587

February 16, 2010

UK Real Estate Update

When is a term sheet not a term sheet?

Letters of intent or term sheets are usually regarded as non-binding, recording the intention of the parties rather than creating a binding agreement. However, in a recent case (Maple Leaf Volatility Master Fund v Rouvroy) the Court of Appeal held that a term sheet could be just that. In this case both parties signed a term sheet for a loan agreement. Although the term sheet expressly provided that it was to be a binding contract, when the lender called for the loan plus interest to be repaid, the borrower argued that there was no valid contract in place as the agreement was based on the term sheet only. The Court of Appeal, however, decided in favour of the lender and enforced the contract.

Contrast this with another recent decision (Whittle Movers v Hollywood Express) where the parties started to perform the contract not having entered into a formal legal agreement. The parties only entered into a letter of intent. The Court of Appeal held in this case that the important terms of the contract were still under negotiation and that there was no legally binding agreement.

These cases show the dangers of starting to perform contracts before they have been formally completed. It is not safe to assume that simply using a term sheet will lead a court to conclude that it is not binding.

In practice, before starting to perform any contract make sure that there is proper legal documentation and a written contract in place. If performance is required before the final contract is entered into the parties should agree the basis upon which that performance will take place. Correspondence should be clearly marked “subject to contract” and state that the draft provisions are not legally binding.