Two companies negotiated the lease of a property and signed a memorandum of understanding. After the negotiations were not perfected into a detailed agreement, the tenant contended that the memorandum of understanding constitutes a binding agreement for all intents and purposes.
The Court held that the memorandum of understanding in this case does not constitute a binding agreement. In order for a memorandum of understanding to be deemed a binding agreement, two cumulative elements must be met: the parties have agreed to enter into a binding agreement and the memorandum of understanding must be sufficiently detailed. The interpretation must also be carried out with regard to the identity of the parties, and when both parties are sophisticated and have the ability to influence the wording of the memorandum of understanding and have commercial understanding regarding the meaning of the wording, the Court must give great weight to the language of the agreement itself, and the expectation is that the parties will draft the memorandum in a way that gives it clear legal validity which is not open to interpretation. Here, both parties are sophisticated and have business knowledge and the tenant, although contending that the document is binding, never officially accepted the terms and did not actually execute the memorandum of understanding. In addition, although the tenant is the one that drafted the memorandum, the document does not include an unequivocal statement regarding its validity in the event that a detailed agreement is not signed. Thus, the memorandum of understanding does not constitute a binding agreement in the circumstances of the case.