As the frozen credit environment slowly begins to thaw, thoughts in the real estate finance world turn to newly issued loan commitments and term sheets. Since many potentially active mortgage lenders have not issued a commitment letter or term sheet for several years or are newly formed companies founded since the inception of the credit crisis, counsel representing such lenders should be mindful of certain pitfalls associated with such preliminary documentation, including the potentially binding nature thereof. Even as term sheets and commitment letters typically anticipate the execution of definitive loan documentation at the later closing of the transaction, courts have found, in certain circumstances, that such preliminary agreements are binding upon the parties thereto, and therefore, a lender may be obligated to make the contemplated mortgage loan regardless of the ultimate desire of the lender.
It is a well established tenet of contract law that even in the absence of a final written agreement, preliminary documentation that sets forth the material terms of the bargain may bind the parties thereto.1 In New York, both federal and state courts have agreed that the most important factor in distinguishing a binding preliminary agreement from a non-binding expression of interest is the intention of the parties at the time of their entry into the understanding. The analysis used by New York State courts and federal courts to consider the issue of the parties’ intent, however, may differ. Consequently, the determination of whether a preliminary agreement between a borrower and mortgage lender, such as a term sheet, memorandum of understanding or commitment letter, has a binding effect may depend on where the case is filed.
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