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Fall 2003-08 An unsigned contract is not binding

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Number 53
Fall 2003

An unsigned contract is not binding

A contract signed by only one of the parties does not bind the other, if it negotiated in good faith. Ysiem Corporation v. Commercial Net Lease Realty, Inc., 328 F.3d 20 (2003).

Ysiem Corporation owned a piece of raw land that it wanted to lease to OfficeMax. OfficeMax, however, would only lease property that had already been developed; which moved Ysiem to contact Commercial Net Lease Realty, Inc., who in the past had developed raw, leased land, and subleased the structure to OfficeMax.

Ysiem and Commercial Net negotiated a land lease agreement, and Commercial Net and OfficeMax signed a letter of intent. The ground lease gave Commercial Net the right to terminate the agreement if it was not able to enter into the sublease with OfficeMax within 60 days.

Ysiem signed the ground lease and sent the document to Commercial Net for counter-signature and return. Commercial Net did not do so, but kept it (unsigned) while it negotiated a rent difference with OfficeMax. The rent negotiations led nowhere. This caused Ysiem to intervene and try to convince OfficeMax that the rent requested by Commercial Net was reasonable. OfficeMax still found it too high. The deal fell through, and Ysiem sued Commercial Net.

Unsigned ground lease

Ysiem claimed that there had been a meeting of the minds between it and Commercial Net, and that under Puerto Rico law a signed document was not necessary to perfect the ground lease.

While agreeing with the general point of law expressed by Ysiem, the U.S. Court of Appeals for the First Circuit found it unnecessary to delve into it in view of the contract's provision "that it would be effective only when executed, and, in context, this obviously means by both sides."

Culpa in contraendo

Puerto Rico law also requires that parties negotiate in good faith, even if a contract is never signed-a doctrine known as culpa in contraendo. "Under this doctrine," the court explained, "negotiations toward an agreement can-even without a letter of intent-readily give rise to mutual expectations that the parties will bargain in good faith and refrain from misconduct."

Commercial Net's action in sitting on the ground lease agreement already signed by Ysiem could be criticized. But was it culpa in contraendo? The court answered in the negative. Ysiem was aware of the rent difference between Commercial Net and OfficeMax, and even participated in the discussion in order to save the project. In any event, "Ysiem would not have been any better off if the ground lease agreement had been signed by Commercial Net and returned to Ysiem," added the Court of Appeals. "Had this occurred, Commercial Net . . . would surely have exercised the option clause to terminate the agreement . . ."


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