Beazer Homes Corp. v. VMIF/Arden Southbridge Venture, LPI: Agreement to Negotiate Declared Unenforceable

A Virginia federal court has considered what legal obligations existed when a property owner and a developer signed a letter of intent regarding the marketing of the property and the purchase negotiations.

On August 6, 2002, Beazer Homes Corporation ("Developer"), a real estate developer and home builder, and VMIF/Anden Southbridge Venture ("Owner"), owner of an approximately 1000 acre land parcel in Virginia, executed a "Letter of Intent" ("Letter of Intent"). The Letter of Intent contained fourteen paragraphs reflecting the "key terms" the parties had reached agreement upon and would include in a contract for the sale of the property. The Letter of Intent stated that both parties agreed to negotiate with each other in good faith, set forth a schedule of deposits for the Developer to make, and stated that if the parties were unable to negotiate and execute an agreement by August 16, 2002, then neither party "shall have any further rights or obligations to the other except as set forth in this paragraph". The "paragraph" contained the following terms: the parties must maintain confidentiality about the Letter of Intent and any subsequent contract they negotiate; the Owner must stop marketing the property and not discuss the sale of the property with anyone other than the Developer; and the parties agree to negotiate in good faith with each other. The parties agreed to extend the expiration of the Letter of Intent until August 23, 2002, at which time the Letter of Intent expired.

The Owner informed the Developer on September 20, 2002 that it had entered into a purchase agreement with a third party for the property. The Developer filed a lawsuit alleging that the Owner had breached its obligations under the Letter of Intent, and the Owner filed a motion with the trial court seeking a dismissal of the Developer's lawsuit.

The United States District Court, Eastern District of Virginia, dismissed most of the Developer's allegations but allowed the lawsuit to proceed on whether the Owner had breached its obligation to maintain the confidentiality of the Letter of Intent and also its duty to not market the property. The court first considered the breach of contract allegations. The court found that there was a fact question over whether the Owner had conducted negotiations with other parties while the Letter of Intent was in effect. Thus, the court ruled that it needed to conduct further proceedings to determine whether the Owner had breached its contractual obligations to maintain the confidentiality of the Letter of Intent and also its promise to not market the property.

Next, the court considered whether the Owner had an obligation to conduct negotiations in good faith. Reviewing Virginia law, the court found that agreements to negotiate at some point in the future are unenforceable. The court found that the Letter of Intent's provisions establishing a duty to negotiate with each other in good faith was the equivalent of an agreement to conduct negotiations in the future, and thus those provisions were unenforceable under Virginia law and so the court dismissed those allegations. Further, the court found that all of the Owner's obligations to the Developer under the Letter of Intent expired on August 23, and thus all of the other allegations made against the Owner were dismissed by the court. Thus, the court allowed the Developer's allegations to proceed over whether the Owner maintained the confidentiality of the Letter of Intent and also its duty to not market the property, but dismissed the remainder of the allegations in the Developer's lawsuit.

Beazer Homes Corp. v. VMIF/Arden Southbridge Venture, LPI, 235 F. Supp. 2d 485 (E.D. Va. 2002).

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