LETTERS OF INTENT IN COMMERCIAL REAL ESTATE TRANSACTIONS

In most instances, the first formal step taken by the parties involved in the sale or leasing of commercial property is to execute a Letter of Intent.  A Letter of Intent commonly known as an “LOI” or Term Sheet is, in the context of real estate, a writing signed by the parties to a proposed real estate transaction, e.g. buyer and seller or landlord and tenant, that identifies the key terms of the transaction that the parties will later incorporate into a formal contract, such as a sales contract or lease. The LOI does not include all the terms of that will be included in the final contract and there is no required form for an LOI. Generally LOIs are in a letter format consisting of a few pages and will contain a summary of the transaction and bullet points as to the material items involved with the transaction. The LOI will be signed by all parties. 

There is no law or type of transaction that requires the parties to use an LOI, it is merely for the convenience and assurance of the parties to the contemplated transaction before they sign a final contract. LOIs are designed to allow the parties to evaluate the benefits of the proposed transaction before expending substantial time and resources. Moreover, it allows the parties to negotiate some of the complex issues upfront and identify some of the contentious issues that may take time to negotiate. LOIs are helpful in complex commercial real estate transactions that may include assigning leases, personal property, and/or addressing non-routine issues, e.g. environmental contamination, litigation with a tenant, land use restrictions, etc. Also, LOIs are sometimes used when the parties anticipate lengthy negotiations before a formal contract is executed and/or the property requires extensive due diligence.  Additionally, sometimes LOIs are beneficial to use in situations where the parties may be hostile to one another for whatever reason. The LOI will act as a roadmap that will help the parties have confidence in signing the final contract. 

Most parties prefer to use LOIs that are non-binding. However, parties are free to make an LOI binding or to just make certain portions of the LOI binding, it is negotiable between the parties.  Some of the key terms that are commonly addressed in the LOI are the: (1) the parties, (2) the property, (3) purchase price, (4) deposit (refundable or non-refundable), (5) due diligence period, (6) seller’s representations and warranties, (7) confidentiality, (8) exclusivity, and (9) closing date. LOIs involving the sale or leasing of commercial real estate also include provisions regarding when the parties can access the property to perform any due diligence and what inspections the buyer/tenant will be allowed to do. Its possible the property is occupied by the seller or the seller’s tenant, so the parties will want to minimize any disruption to the existing user of the property. Confidentiality is also commonly an important term included in LOIs because the parties will be exchanging various types of information between each other, which could include financial information that a party may want to keep confidential. 

In most cases the real estate brokers for the parties can negotiate and prepare the LOI. However, in certain cases the LOI may contain legally binding language that will affect the rights and obligations of the parties and could create liabilities if they are breached.  Therefore, if you have any legal questions regarding the affect of an LOI and/or need assistance in preparing an LOI, please do not hesitate to contact the attorneys at the Blake Law Firm.