Pennsylvania’s Superior Court Holds That Loan Term Sheets May Be Binding Contracts

By Stephen J. Shapiro

A recent decision by Pennsylvania’s Superior Court contains a warning for lenders:  loan term sheets may be binding contracts. In County Line/New Britain Realty, LP v. Harleysville National Bank and Trust Company, County Line, a real estate development partnership, sought to borrow more than $12 million from Harleysville to develop several contiguous parcels of land into a commercial property that would be leased to retailers.

Harleysville’s loan committee approved the loan and emailed County Line a term sheet outlining the details of the loan that the bank had approved. In addition to the amount of the loan, the term sheet identified: “(1) the identity of the borrower and lender; (2) the loan and facility type; (3) the principal amount, purpose, and distribution of the loan; (4) the interest rates; (5) the term of the loan; (6) the manner of the repayment of the loan (amortization); (7) the collateral for the loan; (8) the penalty and fees for the loan; and (9) the guarantors.”

Ten days after County Line received the term sheet, one of its principals called the bank employee handling the transaction to accept the loan described in the term sheet. Harleysville then informed County Line that it had decided to pull the loan and would not proceed with it. County Line responded by filing a lawsuit against Harleysville, which led the bank to agree to reinstate the loan. However, as the parties proceeded towards closing on the loan, they had several disagreements about whether County Line had sufficiently complied with certain conditions for closing the loan.

Ultimately, the loan did not close and County Line sued Harleysville for, among other things, breach of contract. At the conclusion of a 10-day trial, a jury found that Harleysville had breached a valid contract between the parties and awarded County Line $3.6 million in damages.

Among several issues raised on appeal, Harleysville argued that the term sheet was not a binding contract. According to the bank, the term sheet described a proposed loan and was merely an “agreement to agree” at some later date to a definitive loan. Because, argued Harleysville, the term sheet did not evidence an intention by the bank to bind itself legally to the proposed loan; therefore, the term sheet was unenforceable.

Superior Court rejected the bank’s argument. First, the Court made clear that it “[did] not dispute Harleysville’s assertion that the parties intended to further formalize their loan agreement through eventual execution of a note, a mortgage, and other relevant loan documents.” However, the Court concluded that the contents of the term sheet were sufficiently detailed to “evidence a contract wherein Harleysville agreed to issue County Line the contemplated loan.” Therefore, the Court affirmed the judgment in favor of County Line.

In light of the outcome in the County Line case, before issuing detailed term sheets lenders in Pennsylvania should carefully consider whether they are willing to close on loans governed only by the provisions of those term sheets. When in doubt, lenders should consult with counsel to develop strategies to reduce the risk that loan term sheets will become binding agreements to lend.

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