A letter of intent, often called an LOI, is a preliminary document used in commercial real estate transactions to outline the basic terms for a potential sale or lease. Typically one to three pages, the LOI is prepared by a prospective buyer or tenant to formalize discussions and present an offer to the property owner. This document precedes a formal contract and establishes a foundation for negotiations by summarizing the primary deal points for both parties to evaluate.
The Purpose of a Letter of Intent
Parties in a commercial real estate deal use a letter of intent to establish a framework for negotiations before drafting a legally binding contract. This initial step helps gauge the seriousness of the other party and identifies potential deal-breakers early, saving both time and legal fees. The LOI allows parties to agree on major points such as price, timelines, and conditions before investing further resources.
For sellers or landlords, it provides a clear indication of interest, while for buyers or tenants exploring multiple properties, it enables them to present serious offers on several options. By outlining the deal’s core components, the LOI creates a roadmap that guides the drafting of the formal contract.
Key Components of a Commercial Real Estate LOI
A comprehensive letter of intent for a commercial property contains several components that form the backbone of the future agreement. These elements clarify the responsibilities and expectations of the parties involved, ensuring that negotiations begin with a clear and mutual understanding.
- Parties Involved: The LOI must clearly identify the primary parties, including the full legal names of the buyer and seller in a purchase, or the tenant and landlord in a lease. Accurately naming the entities is important for accountability.
- Property Description: The document needs a specific description of the real estate. This includes the full street address, suite numbers, and approximate square footage. For clarity, it might also reference a legal description or parcel number to avoid ambiguity.
- Key Financial Terms: This section details the core financial aspects of the deal. For a sale, it states the proposed purchase price. For a lease, it specifies the lease rate and structure, such as Triple Net (NNN). It also includes the earnest money deposit for a purchase or the security deposit for a lease.
- Important Dates: The LOI establishes a preliminary schedule. It proposes key dates, such as the target closing date or lease commencement date. A fundamental element is the due diligence period, the timeframe the buyer or tenant has to investigate the property thoroughly.
- Contingencies: These are conditions that must be met for the transaction to proceed. Common contingencies include the buyer securing adequate financing, the property passing physical inspections, and receiving confirmation of favorable zoning for its intended use.
- Exclusivity Clause: An LOI frequently includes an exclusivity clause, or a “no-shop” agreement. This provision prevents the seller or landlord from negotiating with other parties for a specified period, giving the current party confidence to invest in due diligence.
Is a Letter of Intent Legally Binding?
A common question is whether an LOI constitutes a legally enforceable contract. In most cases, the majority of an LOI is intentionally non-binding. The document’s primary purpose is to outline the terms of a potential deal, not to create a final agreement. This allows both parties the flexibility to continue negotiations or walk away without legal repercussions if they cannot agree on the final terms of the more detailed contract.
To avoid misunderstandings, an LOI should contain explicit language that states which provisions are non-binding and which are legally binding. While main deal points like purchase price are non-binding, certain clauses are meant to be enforceable. For instance, confidentiality agreements that protect sensitive information and exclusivity clauses that prevent the seller from marketing the property are usually binding.
The distinction between binding and non-binding elements is determined by the language used. Ambiguous wording can lead to disputes where one party believes a binding contract was unintentionally created. For this reason, it is standard practice for both parties to have their attorneys review the LOI before it is signed to ensure the document accurately reflects their intentions and protects their interests.
What Happens After an LOI is Signed?
Once both parties have signed the letter of intent, the transaction moves into a more formal phase. The signed LOI serves as a guide for drafting the definitive, legally binding contract, such as a Purchase and Sale Agreement or a formal Lease Agreement. Attorneys for each party then translate the agreed-upon points from the LOI into the final contract.
The signing of the LOI also marks the official start of the due diligence period. This is the timeframe for the buyer or tenant to conduct a thorough investigation of the property. Activities during this period include physical inspections, environmental assessments, a review of financial records, and confirming proper zoning for its intended use. This step allows the buyer to verify all information before being fully committed.