LOS ANGELES—“Most real estate deals begin with a letter of intent spelling out the principal terms of the deal, the only enforceable paragraph of which is an agreement to keep the transaction strictly confidential. Before due diligence starts on a real estate acquisition, the seller usually requires the buyer to agree to keep anything learned about the property confidential,” says Tom Muller, co-chair of land use and real estate practice at Manatt, Phelps & Phillips LLP. In the exclusive column below, Muller takes a close look at whether or not these confidentiality agreements are really enforceable.

The views expressed in the column below are the author's own.

As a technical legal matter, in general they are enforceable. But as a practical matter, it is hard to imagine a situation in which one could satisfyingly enforce them.

For one thing, such agreements usually permit disclosures required by securities or other laws, disclosures necessary to enforce the agreement and disclosures of materials that can be discovered in some other way.

Then there is the fact that the parties signing the agreements are corporations or LLCs, legal fictions that can't do anything except through their officers, directors, employees, consultants, lawyers, accountants, brokers, etc. But of course, none of these dozens of people who receive the confidential information actually signs the confidentiality agreement, so the agreement typically says that the parties shall “require” those people to conform. Which may or may not happen, but in any event doesn't make the confidentiality agreement enforceable against those individuals.

Often we see these agreements breached shortly after they're executed and signed, rarely out of malice and almost always because the renegade discloser either didn't know about the confidentiality agreement, forgot about it, or didn't think it applied to the fact that a deal was underway.

The more thorough versions of these agreements also require the buyer to return all confidential materials if the deal does not close. When due diligence information was transmitted on paper, this made some sense. But in this age of electronic war rooms and backed up computer drives, it would be remarkably difficult for a buyer to reliably destroy all copies of due diligence materials downloaded to its computer systems.

For these reasons, actual attempts to enforce these agreements in court are remarkably rare. It is difficult to prove that a party to the agreement actually breached it, and once the information is disclosed, it's hard to see what the judge is supposed to do about it. While damages normally compensate for breach of a contract, most disclosures of confidential information don't cause quantifiable money damages, no matter how much they annoy the injured party.

For information that truly must be kept confidential, the best approach, learned by most in kindergarten, is to strictly limit the number of people who get the information. Limiting diligence teams to narrowly defined areas, masking parties' identities by code names, limiting the financial terms to a few key people, read-only war rooms and getting the deal done quickly are all ways to minimize unwanted disclosures.

At the end of the day though, confidentiality agreements should be thought of as memorializing unenforceably the parties' good faith agreement to actually keep the secret, again underscoring the importance of choosing trustworthy people with whom to do business.

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Natalie Dolce

Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.