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Letter of Intent enforceable as settlement where it contained all necessary terms and did not explicitly reject being bound.

Falls Garden Condominium Association, Inc. v. Falls Homeowners Association, Inc.
No. 0443 Sept. Term, 2012, ___ A.3d___ (2013)
by Gregory S. Emrick, Associate
Semmes, Bowen & Semmes (www.semmes.com)

Falls Garden Condominium Association, Inc. (“Falls Garden”) mistakenly believed that it owned 65 parking spaces adjacent to their building. After 23 years, Falls Garden set up parking signs indicating unauthorized vehicles would be towed. The actual lot owner, Falls Homeowners Association, Inc. (“FHA”), contested Falls Garden’s right to erect the signs and Falls Garden filed an action for declaratory judgment. During the course of the litigation, the parties explored the potential of settlement. On August 17, 2011, the counsel for the parties executed a Letter of Intent outlining significant portions of the settlement agreement, which was contingent upon FHA obtaining approval of two-thirds of its membership to lease the disputed parking spaces. FHA obtained the necessary approval and submitted a lease agreement with the Letter of Intent terms included, but Falls Garden failed to respond. On November 22, 2011, new counsel for Falls Garden indicated that Falls Garden wanted to go back to “pre-litigation status” and objected to numerous terms in the lease agreement. FHA moved to enforce the settlement. The trial court held that the Letter of Intent demonstrated that the parties had reached an executory accord and enforced the agreement. Falls Garden appealed.

Falls Garden argued that the Letter of Intent did not represent the final agreement between the parties, but was only a basic framework for an agreement. Falls Garden argued that there was no settlement because the agreement had not been memorialized in a final document and executed by the parties. Falls Garden also argued that it objected to numerous terms of the proposed lease. FHA argued that the trial court correctly found there was an executory accord that contained the necessary terms of the agreement and it was therefore enforceable.

The Court noted that settlement agreements are contracts, and the determination of whether the Letter of Intent was enforceable was governed by Maryland’s contract law. The Court observed that there are four (4) categories of Letters of Intent.

“(1) At one extreme, the parties may say specifically that they intend not to be bound until the formal writing is executed, or one of the parties has announced to the other such an intention. (2) Next, there are cases in which they clearly point out one or more specific matters on which they must yet agree before negotiations are concluded. (3) There are many cases in which the parties express definite agreement on all necessary terms, and say nothing as to other relevant matters that are not essential, but that other people often include in similar contracts. (4) At the opposite extreme are cases like those of the third class, with the addition that the parties expressly state that they intend their present expressions to be a binding agreement or contract; such an express statement should be conclusive on the question of their ‘intention.’”

The Court then reviewed the specific language of the Letter of Intent and noted that the trial court properly found it contained all the necessary terms of the parties’ basic agreement and omitted any express term that the parties were not bound. Therefore, the Letter of Intent was enforceable as an executory accord — “an agreement for the future discharge of an existing claim by a substituted performance.” Here, the condition of the two-thirds membership approval was met and, by operation of law, the dispute had been resolved. The Court further held that a final document was not necessary to enforce the agreement, which would only have been a written version of the prior agreement. Finally, the Court held that the trial court did not err in issuing its decision without an evidentiary hearing, as no party requested that testimony be taken, and the language of the Letter of Intent was unambiguous as a matter of law. The Court of Special Appeals affirmed the lower court’s judgment to enforce the settlement.