Letter of intent has role in good-faith negotiations

A column examining the ins and outs of contract issues

By Steven M. Harrisis a partner at McDonald Hopkins in Chicago concentrating on health care law and co-author of Medical Practice Divorce. He writes the "Contract Language" column. Posted May 2, 2005.

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Before you sign a contract for something such as the sale of your practice, purchase of equipment, or an affiliation with another practice or health care entity, you might find yourself first signing a letter of intent.

A letter of intent, or LOI, includes terms for negotiation prior to the execution of a final binding contract.

The LOI is not a legal contract and is not legally binding, except as it relates to the negotiations between the parties. An LOI may also be known as a letter of understanding, memorandum of agreement, or memorandum of understanding.

The purpose of an LOI is to outline certain terms and conditions of a proposed transaction and provide agreement between the parties as to confidentiality, negotiations, noninfringement of third-party rights, and the primary terms that are not binding until execution of final contract.

An LOI is signed and agreed to by all of the parties to a transaction as a sign of negotiation, in good faith, of the terms and conditions of a formal agreement between the parties. For example, during negotiations for the purchase of a medical practice, the parties might enter into an LOI that outlines the proposed terms of the purchase.

The LOI might also state that the physicians shall not entertain any offers from other physicians, or participate in any discussions with other parties, with respect to the purchase of the medical practice.

Usually, an LOI establishes a negotiation deadline and LOI termination date, and identifies a dispute resolution method, or location of litigation, in the event the negotiations deadlock or the LOI is breached.

Examples of LOI language

An LOI, like a contract, can have formalized language. The following is an example of an LOI exclusivity provision:

Exclusive dealing.For a period of (certain amount of) days from the date that this LOI is executed by both parties (the "exclusivity period"), neither party shall (i) enter into or conduct any discussions with any other third party relative to the acquisition of the medical practice, assets or stock of the seller, (ii) solicit or encourage, directly or indirectly, submission of any inquiry, proposal or offer related to the acquisition of the medical practice, assets or stock of the seller; or (iii) entertain any offer to purchase the medical practice, assets or stock of the seller.

While an LOI signals everyone is negotiating in good faith, it still must be in the letter. Here's an example of such language:

Negotiations. Buyer and seller shall negotiate in good faith to reach agreement regarding an asset purchase agreement which shall be executed on or before the closing date of (fill in date). This entire transaction is subject to the negotiation and execution of a binding contract to be negotiated by and between the parties following execution of this LOI.

If you are buying a practice, make sure you look for specific language in an LOI which enables you to have access to the practice's records, patient lists, and financials in order to conduct your due diligence. You might consider including the following provision in your LOI:

Access. Seller shall give buyer and its advisers access to all of the books, records, financial statements, patient lists and other documents and materials relating to the medical practice and its assets as buyer may require to conduct his due diligence prior to the purchase of the medical practice and closing date.

It is important that the assumption of risk is not transferred from the seller to the buyer until a final contract is executed between the parties due to patient care, insurance, and professional liability issues.

Make sure that this is clearly spelled out in any LOI you review prior to signing. The following is an example of such an LOI provision:

Assumption of liabilities. Buyer shall assume no liabilities of any kind relating to the seller or its medical practice, except the obligations arising under any contracts specifically assumed by the buyer in the binding asset purchase agreement.

During negotiations and prior to executing an LOI, it is critical to place a deadline on the LOI terms, especially if the parties are not moving toward agreement regarding business terms and the transition of the medical practice.

You might consider including the following language in your LOI:

Termination. In the event the parties have not executed an asset purchase agreement on or before the expiration date of the exclusivity period, either party may terminate this LOI, and the parties shall have no further obligations hereunder, provided that the party initiating such termination is not in breach of any of the provisions of this LOI.

While letters of intent are not binding contracts, you should make sure that you carefully review all proposed LOI terms prior to signing. The letters set the stage for the negotiation of business and legal terms of a final contract.

Steven M. Harris is a partner at McDonald Hopkins in Chicago concentrating on health care law and co-author of Medical Practice Divorce. He writes the "Contract Language" column.

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