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Letter of Intent Unenforceable; Merely an “Agreement to Agree”

A company named Eminence owned properties that it wanted to re-zone and develop into high-density apartment buildings. They approached Twelve Gates with an offer to make it an equity partner in its development plan; Twelve Gates would provide the funding to finance the equity portion of a construction loan, in exchange for a 60 percent interest in the properties.

In a Letter of Intent (LOI), Eminence offered Twelve Gates a 30-day period to conduct due diligence; after that, the agreement would “go firm” with Twelve Gates being required to invest over $13 million. The LOI provided for certain conditions to be filled, and required Twelve Gates to eventually waive the due diligence condition. If Twelve Gates chose not to do so, it could walk away from the project and have its $100,000 in deposits refunded.

The negotiations were complex, and took several months. The due diligence period was extended several times, and two amending agreements were signed. However, a dispute later arose as to the agreed terms.

Among other things, Twelve Gates claimed that Eminence had breached the LOI in several respects, including a failure to grant a mortgage on desirable terms. Twelve Gates also refused to waive certain conditions that were the subject of the due diligence portion of the LOI.

Ultimately, Eminence advised that it considered the LOI to be at an end, and declared Twelve Gates’ deposit to be forfeited. Its stated reason was a loss of confidence in Twelve Gates’ ability to provide financing for the projects.

This triggered Twelve Gates to take a drastic step: Without giving Eminence notice in advance, it obtained a Certificate of Pending Litigation (CPL) from the court, which restricted Eminence from dealing with its property pending the outcome of their dispute. Twelve Gates also launched a lawsuit claiming specific performance of the LOI. In response, Eminence brought a motion discharging the CPL to remove the restriction on dealing with the land.

The court was asked to step in to resolve the deadlock. Turning first to Twelve Gates’ position, the court held that specific performance of the LOI was simply not appropriate on these facts. That court-imposed remedy could only be applied to those agreements for which all the terms had been settled, which was not the case here. The LOI was merely an “agreement to agree” or an “agreement to negotiate,” which lacked the necessary certainty to be enforceable. Many essential terms of the LOI were still unresolved, including those relating to the mortgage.

As no legally-valid agreement was in place, by extension this meant that Twelve Gates fell short of meeting the onus to show that it had a “reasonable claim to an interest” in Eminence’s lands, as the legal test for granting a CPL required.

This bolstered the court’s other conclusions in Eminence’s favour: The CPL had been improperly granted by the motion judge in the first place

Twelve Gates had failed to make full and frank disclosure of the material facts in this complex series of negotiations, and had provided “a mere 18 exhibits” in support of its application for the CPL. For example, numerous emails that spoke to the issue of whether Eminence had been cooperative with Twelve Gates’ due diligence efforts were missing. In the court’s view, Twelve Gates’ evidence fell far short of what the motion judge needed to properly assess whether the test for granting a CPL was met.

Also, since the motion for a CPL was brought without notice to Eminence, Twelve Gates was obliged to give a balanced presentation to the motion judge, including a fair outline of not only its own legal position, but Eminence’s as well. Yet, the motion judge had been given only a brief and one-sided outline of Twelve Gates’ claim.

The court accordingly rejected Twelve Gates’ request for specific performance, and granted Eminence’s motion to discharge the CPL. See: Twelve Gates Capital Group Inc. v. Eminence Living Inc., 2017 ONSC 3506.