Often overlooked, and even more often mischaracterized, a letter of intent (LOI) provides a valuable guide and preliminary structure for parties entering into a commercial real estate transaction. However, without a proper understanding of the purpose and utility, uninformed parties may find themselves in a binding transaction without a way out – even without having signed a formal purchase and sale agreement or lease.
A letter of intent is a road map for your commercial real estate journey. It helps plan a course by establishing important deal terms, marking stops along the way in the form of contingencies to completion or closing, and considering necessary bathroom breaks too. These include risks or obstacles that you may face before you reach your ultimate destination. These considerations can be memorialized in writing in the form of an LOI.
Purpose of a Letter of Intent
An LOI gives parties time to discuss, evaluate and prioritize material terms and reach a “meeting of the minds” on essential deal terms. The parties will be able to minimize their initial excitement and take a rational, contemplative approach to the deal. After all, if the parties can’t reach initial consensus on the basic terms, why take the trip at all?
Likewise, an LOI often will enable the parties to save time and money.
Seller: “We’ll work out a fair price and terms, don’t worry.” says the aggressive seller. “I’ll send the purchase contract to your attorney to review.”
Buyer: “What is the price? Will you agree to a financing contingency? What about an inspection period? What are your expectations regarding the closing date?” asks the conscientious, economical and diligent buyer. “I’d rather not spend my time and money unless we can at least agree on a price. Let’s discuss the terms up front so we both have an understanding of our expectations and limitations. Once we agree, we can write them into a letter of intent.”
Seller: “I’ll call you tomorrow,” replies the seller.
An Expression of Intent or a Binding Agreement?
As previously stated, a letter of intent provides a great beginning for a successful business journey. But it should be just that, an expression of intent to enter into a transaction. Once the parties have agreed in principle to the terms for the transaction, whether verbally, on paper or in an email exchange, those terms can be written by an attorney or broker into a letter of intent. The parties must, however, recognize that there may be other material terms or legal requirements to be negotiated to protect the parties and formalize the deal. Those can be included in the final binding agreement. The good news is, at this stage, the parties still can change course. In fact, until a formal binding agreement is signed and delivered, the parties should feel free to change their minds on any particular deal term or on the entire deal.
Be mindful, however, that if the letter of intent contains all or enough of the material terms necessary to complete a transaction without necessary disclaimers, one could find himself or herself in a deal they never intended to enter into. To avoid having your LOI construed as a binding agreement, it must clearly state that it simply is an expression of the parties intent to enter into a formal agreement at a future date memorializing the material terms for the lease or purchase, and that the parties do not intend for it to be a legally binding agreement. A sample provision follows:
This letter is merely a description of terms and is not intended to be a legally binding agreement. Nothing contained herein shall be used or relied upon by either party hereto to attempt to demonstrate that the parties have entered into a binding agreement or for any other purpose.
There is much more to discuss about letters of intent. In my next blog post, I will discuss LOI terms that should be binding upon the parties, ways to prevent surreptitious behavior and terms that should survive termination of an LOI.
As always, please feel free to contact me with any questions via email or by phone at 404-693-8302.