Letter of Intent (LOI) in Real Estate

 

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A letter of intent (LOI) is a document between two parties that intend to enter into a business transaction with each other. With this letter, parties agree that they aim to formalize the transaction with a legally binding agreement. You can use an LOI for various agreements that involve material transactions, including joint venture agreements, merger and acquisition transaction agreements and real property lease agreements.

A letter of intent (sometimes referred to as a letter of interest) outlines the intent of one party relative to another. These types of letters can be used in a variety of situations including business negotiations, to signal the intent to purchase real estate.

A letter of intent is commonly used as an initial proposal to the other party. These proposals may include purchases, acquisitions, contracts and mergers. While not binding, a letter of intent can help clarify the points of a deal or provide protection should a deal collapse. It lay down a fundamental agreement between parties before committing more time and effort in further negotiations. In the LOI, parties outline the material terms and conditions of the intended business agreement and clarify their respective responsibilities. 

Real Estate Letter of Intent

The real estate letter of intent outlines broad terms for negotiating a final agreement between a buyer or tenant and an owner of a property. The purpose of a letter of intent is to get both parties to come to a non-binding agreement over the terms of a sale or lease. Once the letter is signed, the parties will each go to their respective counsel and draft legally binding contracts, commonly in the form of a purchase agreement or lease agreement.

Purpose of a Letter of Intent

The purpose of a letter of intent is to not only alert the property owner that you are interested in selling or leasing the property, but it also serves as a hint of what you will bring to the table. It is not designed to include every detail of the proposed terms of sale or lease, but to give enough details that the other parties can determine whether to move forward with you or continue to talk with other potential buyers.

Is a Letter of Intent Binding?

It is up to the parties to determine whether the letter is legally binding. After this decision is made, a statement indicating the binding status of the document should be incorporated into the language of the form. Without such a written declaration, it will be far more challenging to enforce the validity of the agreement in court, and the case would likely be dismissed due to the uncertainty of the letter’s intent.

How do you write a letter of intent in commercial real estate?

The content of a letter of intent may change based on who is writing it. Typically an LOI is just one to three pages, but it can be longer depending on the complexity of the property. Regardless, an LOI should include:

  1. An introduction paragraph: a brief sentence or two stating what the letter's purpose is.
  2. Involved parties, including the buyer's and seller's names and contact information.
  3. A property description, including the address and possibly the legal description.
  4. The purchase price of the property, as well as terms for financing or loan contingency, if               applicable.
  5. Escrow, including the escrow agent and sum to be paid as an escrow deposit.
  6. Due diligence including the length of time allotted to the buyer to conduct due diligence and specific documents or items that need to be produced by the seller during this period.
  7. The closing date.
  8. Closing costs.
  9. The inspection period, including how long the buyer has to conduct inspections, the specific inspections that will be completed, and terms to exit the agreement if it does not meet the buyer's criteria during the allotted inspection period.
  10. Whether the offer is subject to additional clauses or terms outside of the clauses above, such as broker commission, or covenants.
  11. Date of acceptance of the LOI, which could be a specific date or the date the final party signs the LOI.
  12. A closing statement, which usually includes a sentence or two about how the LOI is not a contract and is nonbinding, followed by signatures from both parties.

How Is a Letter of Intent (LOI) different Than Agreement to Sale?

While a Agreement to Sale is a binding contract with rights and obligations for each party that contains all the terms and conditions of the transaction; a preceding Letter Of Intent (LOI) is often overlooked for its significance. Although non-binding a comprehensive LOI with the same deal points will benefit both the seller and the buyer.  When all major sales terms, key ancillary agreements and important conditions are negotiated and agreed on by both parties they are in a position of much higher degree of success and their true intention of moving forward on the deal. Some of the basic items of a typical LOI should contain purchase price and terms; assets covered and delivery date; due diligence period; closing date; investigation of the business; consulting arrangements with owner or key employees; confidential information; releasing of public information, expenses and conditions  to closing.

When a seller accepts an LOI with the desired deal points he has exercised his strength in an active market with multiple buyers and further reduce opportunity loss of other qualified buyers by removing the business off the market during the due diligence period. The buyer would reduce potential disagreements on open items and the need for renegotiation. And they both would reduce the chance of wasting precious time and incurred expenses. Having an experienced agent will guide you through the entire process, make recommendations and handle the negotiation on your behalf.

Deep Shankar Roy v. Hansa V. Gandhi, First Appeal No. 492 of 2002

The letter of intent cannot be said to be an agreement to sell for the simple reason that according to the contents of the letter of intent, only upon payment of the entire purchase price, the developer and the plaintiffs were to enter into an agreement with regard to sale of the flats. This fact clearly denotes that no agreement to sell had been entered into between the plaintiffs and the developer and in absence of such agreements; there cannot be any right in favour of the plaintiffs with regard to specific performance of any contract. Thus, the High Court did not commit any error while coming to the conclusion that there was no binding contract or agreement in existence between the plaintiffs and the developer and therefore, the trial court could not have decreed the suit for specific performance.

Identifying the Benefits of LOIs

LOIs have two key benefits. They are usually much faster and less expensive to draft than purchase agreements. This is especially salient in markets where attorneys usually get involved in drafting purchase agreements, which can both slow down the process and make it more expensive. For buyers that make multiple offers, LOIs have the benefit of not requiring earnest money checks. This lets the buyer keep control of their money until they know that they have a deal that works for them and the seller.

Drawbacks to LOIs

The LOI has two key drawbacks. The first is that it introduces another step into the negotiation process. Instead of going right to a contract, the two sides negotiate business terms then have to go back and re-negotiate everything when they generate the contract. This is time consuming and, if an attorney is involved for both documents, potentially expensive.

LOIs also has an unclear legal status. When you have a purchase agreement, you know where you stand legally. With an LOI, you frequently have a document that meets the legal standard to be a contract, but you don't call it a contract. At times, a court will consider it a contract. As such, a non-binding LOI could actually be a binding purchase agreement. It's hard to be sure of how a court will rule until a problem comes up.

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