By the time a major transaction is finalized, its terms typically will be enshrined in a lengthy legal agreement – or, indeed, in multiple agreements (sometimes enough of them to fill a conference room table). Hotel development transactions, for example, may include a management agreement, a technical assistance agreement, and centralized cost reimbursement agreements, among others.
Yet many large deals, including those that ultimately end up with an array of lengthy documents, will begin with a single short agreement between the parties, such as a memorandum of understanding (MOU).
This article discusses MOUs in the context of hotel development transactions, in which they play a particularly important role. However, it is important to note that many different types of transactions make use of MOUs, so a number of the principles described in this article are likely to apply beyond the hotel project setting to deal-making in general. Part I of this article discusses what MOUs are and why they are so important. Next month, Part II will cover particular deal points that are typically addressed in MOUs for hotel development transactions.
What is an MOU?
In different jurisdictions and different sectors, an MOU (or a “letter of intent” or “heads of terms”) might take on a slightly different meaning, as far as the terms it includes, the parties to it, and its enforceability as a legal document.
For purposes of this article, however, we shall use a simplifying approach and take “MOU” just to mean a short, preliminary agreement entered into by the parties to the agreement at an early stage of the transaction process. Some MOUs are longer versus shorter, and more detailed versus less detailed, but the basic point is that MOUs outline the key terms that the parties will use as the foundation for their final agreements.
In the hotel development context, the MOU will reflect the key terms between the owner and the operator – such as management fees, term of the agreement, and certain key operational issues – that both sides consider necessary to agree up front before they invest the time, energy and costs to negotiate a suite of lengthy, detailed agreements.
Why is the MOU important? The MOU is typically very important to the deal because it will shape the negotiations over the final transaction agreements. Many or most of the key terms in the final agreements will be obliged to follow the way such terms are treated in the MOU.
As mentioned above, the MOU may or may not specify that its terms shall be legally binding between the parties. However, whether or not the MOU is legally binding, it will often carry significant weight as a practical matter; if one party attempts to deviate from the MOU, the other party can accuse of it of not acting in good faith or of backtracking from a position already discussed and agreed.
Thus, it is important for the parties to take the negotiation of an MOU as seriously as the negotiation of the final agreements. Indeed, the MOU might be the most crucial stage of the entire negotiation process. With this in mind, the parties often will be well advised to engage any third-party advisors (including commercial consultants, technical advisors, or lawyers) early in the negotiation process to assist with the MOU, rather than waiting until the MOU already has been signed.