Non-binding agreements in Real Estate Transactions

Alessandro Clemente

A non-binding contract represents an agreement in which the parties are not legally obliged to carry out its terms.

Institutional investors are generally used to approach a real estate transaction in Italy manifesing their interest through non-binding agreements.

This type of practice happens quite often for medium-large size value transactions (starting from Eur 1 million), but not necessary or legally limited to those.

Usually, the use of non-binding agreements depends on the parties being willing to negotiate the main terms and conditions of a transaction, without being legally obliged to close the deal in the absence of a satisfactory mutual agreement or simply to better evaluate the object of the transaction based on a properly done Market Research, Legal Due Diligence as well as and Accounting and Fiscal one.

Both Memorandum of Understanding (MOU) and Letter of Intent (LOI) represent the most used and widely recognized pre-contractual solutions to help the negotiation start.

Medium-size transactions having a Property Developer (Off-Plan Project Investor side, Important renovation, Real Estate Trading/Flipping) as buyer are also often introduced through a Non-Binding Option Contract.

Can non-binding agreements be judicially enforced in Italy?

Non-binding agreements cannot be enforced in Court, as Judges in Italy are required by the applicable law to follow the parties’ consent.

According to article 1362 of the Italian Civil Code, any Judge must interpret a contract based on the common intentions and determinations the parties came to: accordingly, if the parties determine that the agreement is not meant to be as binding, the Judge can not enforce it as if it was a binding one.

On the other hand, a misleading commercial behaviour, unfaithful declaration or incorrect determinant information during negotiations could lead to pre-contractual responsabily as per article 1337 of the Italian Civil Code.

In this cases the Judge can issue a Verdict coming with the compensation for damages occurred during the negotiation in favor of the part acting in good faith.