An Offer to Purchase – Is it worth the paper it is written on?
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Written by
Sarah Stoddart
- and posted in Pharmacy
When selling or purchasing a pharmacy, one of the first steps in the process is completing an Offer to Purchase (OTP). This document, also referred to as a Heads of Agreement or Letter of Offer or Intent, is commonly used during pre-contractual negotiations. It outlines the proposed terms for the sale and purchase of the pharmacy, including the purchase price and conditions of purchase (such as finance, due diligence and regulatory approval). The terms in the OTP are then used to draft a contract of sale which becomes binding once signed by the buyer and seller.
But how much significance does an OTP hold? Is it legally binding, or is it just a piece of paper of minimal impact? Understanding the legal and practical implications of an OTP is essential for successfully navigating the sale and purchase of a pharmacy business. If you get it wrong, the consequences can be dire.
Non-Binding or Binding – What is it?
One of the most important aspects to consider when dealing with an OTP is whether it is legally binding. The answer largely depends on how the OTP is drafted.
Non-Binding OTP
In many cases, the OTP is drafted as a “non-binding” document, meaning it simply reflects the parties’ intentions regarding the transaction, rather than creating any legal obligations. Although the OTP is an important document in the transaction, it is the contract of sale once signed, that establishes the legally binding transaction. As a result, the parties can still negotiate the terms of the transaction during the negotiations which occur before the contract is signed. However, this does not mean that negotiating parties should overlook the importance of carefully drafting an OTP. Even if the OTP expressly states it is non-binding, an OTP could still be considered enforceable under contract law if one party seeks to enforce its terms. Further, a party to the transaction may assert that what is in the OTP is what was agreed and refuse to negotiate on any further points. It is for that reason you should ensure all important terms are set out in the OTP.
Binding OTP
In some cases, the OTP may include specific provisions which are binding on the parties even if the transaction does not proceed. This includes provisions relating to confidentiality and exclusivity. Even if the OTP is terminated, the binding clauses remain in effect and the parties are obligated to comply with those terms or face potential legal action if found in breach of those terms.
In some cases, the entire document could be deemed legally binding. If one party decides not to proceed with the transaction, but the other party wishes to enforce performance of the agreement, the OTP could be argued as being a binding agreement, particularly if certain terms (such as payment of the deposit) have already been performed. For the purchaser, this could mean being required to secure the necessary funds to complete the purchase or be exposed to a claim for breach of contract. For a vendor, they may be prevented from accepting other offers, including those with higher purchase prices or more favourable terms.
Practical and Legal Considerations
While an OTP is a valuable tool for early negotiations, its true worth lies in the legal drafting and practical performance of its terms.
A well-drafted OTP can provide a clear foundation for the transaction, helping to efficiently progress the transaction with minimal disputes. On the other hand, if an OTP is poorly drafted or if the parties fail to seek appropriate legal advice prior to signing so as to understand the true meaning of the document, the OTP could lead to confusion, disputes and legal complications, which are time-consuming, stressful and costly to resolve.
Final Thoughts
Though not absolutely necessary for every pharmacy transaction, when drafted and used correctly, an OTP can be a useful tool. It serves as a starting point for negotiations and helps set the foundation for the formal contract. However, its value depends heavily on the care and expertise with which it is drafted. To ensure the OTP serves its intended purpose, both parties should seek professional advice from professionals with pharmacy expertise before signing. When well drafted, an OTP can be a valuable document—worth the paper it’s written on.
This article is intended to be for general information only. It does not constitute legal advice nor does it establish a relationship of client and lawyer. Specific circumstances or changes in law may vary the accuracy or applicability of the information published. We recommend seeking specific legal advice particular to your circumstances before taking any action, or refraining from taking any action, on any issue dealt with in this article.