When A One-Page Proposal Becomes a Binding $14M Contract

Would it surprise you to know that a one-page "Final Proposal" that is "subject ...  to the terms and agreement of a formal agreement" is a binding contract that's going to cost the buyer over $14.4M (more than $20M, with interest)? Well, the buyer certainly seems to be surprised; incredulous, in fact.

A U.S. District judge in Calilfornia upheld a unanimous jury finding of fact "that the parties’ final proposal was a binding contract and that [the buyer] breached it when [the buyer] took the position that it was not even a contract and could be ignored.”

The CEO of the buyer argues that the clause "subject only to the terms and agreement of a formal agreement" is equivalent to "We thought we'd like to have it, but we didn't really need it." The jury and the judge didn't see it that way.

As a practical matter, this ruling reminds us that, sometimes, it doesn't take much to create the essential terms of a binding contract; in fact, it's possible to get a binding $14M contract on to one page (see below). If you don't want to be bound by a "proposal," "letter of intent," "term sheet," "memorandum of understanding," or other "hug before marriage," then you'd better make sure that you leave yourself a clear means of exit in the document, or you, too, may be in for a big (unpleasant) surprise.

[Proposal Date]

Buyer Executive’s Name  
Executive’s Title
Address
City State Zip

RE: Land lease / Name
Location

FINAL PROPOSAL

1.    Ground lease at $100,000 per month. Lease to include increases of three (3%) annually.

2.    Seller is given a 10 year put at a capitalization rate of 9% at the then current annual rental. Buyer to cooperate with a tax free exchange.

3.    Buyer to be given a call at the end of ten years at a 9% capitalization rate.

4.    Seller to be offered an option to lease office space of up to 5000 square feet in the new [name of project] complex at $4.00 per square foot per month, subject to the terms and conditions of a new lease.

5.    Seller to be reimbursed $75,000 to buy out the current lease holder, [name of current tenant].

6.    Buyer to pay for the moving expenses of Seller not to exceed $25,000.00

7.    Buyer to prepare a legal agreement for Seller’s review to finalize the agreement.

8.    Effective date of agreement as of date of vacating premises.

9.    The above agreement must be accepted via fax to 000-000-0000 no later than 10:00 am on [day after Proposal Date], at which time this counter offer will automatically expire.

The above terms are hereby accepted by the parties subject only to approval of the terms and conditions of a formal agreement.

[Signature lines]