10 Things You Need to Know About Letters of Intent
There is often a lot of confusion around a letter of intent when buying/selling commercial real estate. Is it binding or non-binding? Is it the same thing as a term sheet or memoranda of understanding? Buying/selling commercial real estate is a serious time in an investor or owner-to-be’s life. Buying property of any type is a big financial investment, but buying a property you hope to make money off of is an even bigger leap. That’s why it’s important to truly understand everything about letters of intent.
What is a letter of intent?
A letter of intent is the first step when buying/selling commercial real estate. It can help you judge whether or not there’s a great deal on the table or it’s a flop. A letter of intent is, quite literally, a letter from one party to the other countersigned by an addressee. While it may look informal, these letters are legally binding unless they explicitly state otherwise.
Letters of intent are usually the first step in negotiating a deal because they bring any issues right out into the open. If there’s something that the parties disagree on and cannot resolve, then the deal is off before it even started. Because LOIs cut to the chase, they can save both parties a good bit of money when negotiating a deal.
Letters of intent set the groundwork for the negotiations involved with buying/selling commercial real estate and mergers and acquisitions beyond the real estate industry. They list out terms that both parties have already agreed to, what’s left to be negotiated, and specify a timeframe within which negotiations should be completed.
While letters of intent are similar to a term sheet or memoranda of understanding, they are not the same thing. A term sheet is a nonbinding agreement that just sets forth the terms and conditions of an investment. A memorandum of understanding is a more formal document that, while technically nonbinding, is still viewed as a serious document under the law; while they can be used in real estate transactions, they’re more common in international agreements.
Letters of Intent in Real Estate Transactions
While letters of intent are used in many different industries, in commercial real estate they’re used to document an intent to purchase. These letters allow the buyer to provide evidence of a purchase deal to their lender, document progress towards the end of negotiations, and also document terms before committing to the sale.
When used in real estate, it’s a great way to minimize misunderstandings. However, they are usually non-binding in real estate and the seller can still sell the property to someone else.
What’s the impact of a LOI on negotiations?
Letters of intent can have huge impacts on negotiations between two parties. As stated earlier, they can end negotiations before they even start, but they also set ground work for a successful negotiation.
These letters can protect both parties throughout negotiations. For example, it can restrict one parties ability to poach employees from the other party should the deal fall apart. It can also specifically protect the buyer by setting conditions around their obligations should they be unable to secure financing for the position.
Once you enter into an agreement with another party via a letter of intent, there are some downsides. As negotiations continue over the agreed upon time period, the markets may change against you. You can also inadvertently come across public disclosure agreements and find yourself releasing information you didn’t necessarily want to.
Are letters of intent legally binding?
How binding a letter of intent is depends on the specific content of each letter. If a letter has a clear statement that it is not legally binding, then clearly it isn’t. However, if a LOI is more formal and does not contain a clear statement of legality, courts may rule that it is legally binding. In order to be safe in your negotiations, treat all documents without an explicit statement of legality as binding. If there isn’t a statement or the statement is unclear, think hard before signing.
To make buying/selling commercial real estate even more complicated, some LOIs have specific sections of contract that are binding and other sections that are not. If this is the case, specific elements that are usually binding can include who writes the contract, the date a deal needs to be reached by, and financing requirements.
When it comes to buying/selling commercial real estate, your broker can draft the letter. However, you may need to get a lawyer involved if there are parts of the contract that are legally binding. If this is the case, the legal language needs to be meticulous and requires a lawyer’s expertise.
Use A Broker Who Understands
Buying and selling commercial real estate in Frederick both represent incredible opportunities – but they can also represent high risk and lots of hassle.
Rockpoint Commercial knows the ins and outs of buying/selling commercial real estate in Frederick, MD. Backed up by years of brokerage experience, we know how to help you with everything involved, including letters of intent.
Minimize the hassle and maximize your value. Get in touch with Rockpoint Commercial today.