December 23, 2010 8:39 am
Last week, I had a phone call from a worried client, who was selling her restaurant She had agreed to sell the assets of this business to someone who was, however, doing nothing about instructing lawyers, undertaking due diligence or dealing with the other usual steps a business purchaser usually considers. Furthermore, my client had subsequently received a much better offer from another party, who was in funds and anxious to move ahead quickly.
The problem soon became clear. My client had, with the first interested party, signed a scrap of paper containing somewhat muddled outline terms of sale. She believed that this was just a starting point, which would be clarified and put into a proper form of binding contract by the solicitors for the parties in due course. The would-be buyer insisted that the paper was the contract, that there was no need for expensive advisors and that the purchase would take place when he was ready and willing to do so.
In this complex world, it is easy to forget that the ingredients needed to have a binding business contract are pretty basic . If the parties, the business assets to be sold, the price to be paid and the timing can be identified, one may easily have an agreement which is enforceable at law. Even if no specific completion date is mentioned, the courts may infer that there is a contract in existence which needs only to be performed within a reasonable time.
It is fundamental in negotiations like this to make clear that any resulting agreement is expressed to be ‘ subject to contract’, although there may be elements which are intended to be binding in any event, such as a duty of confidentiality or an exclusive negotiating period. Any such elements should be expressed as being binding from the outset.
Preliminary agreements like this, usually called ‘ heads of terms’ or ‘ memorandum of sale’, should be in writing and should contain all the relevant aspects of the transaction. They should also be checked ( if not actually drafted) by your solicitor before you sign since, even though the terms may not be legally binding at that stage, it becomes very difficult in practice to change them once matters are agreed in principle.
It is a false economy to delay getting professional advice at the appropriate stage. Preliminary agreements which have been properly drafted can flag up the main issues in clear terms, so as to avoid arguments and delays as to what was intended later on and, thereby, avoid the risk of the transaction becoming abortive.
In the meantime, I am attempting to untangle the problems caused by the scrap of paper…
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This post was written by Andrew