A Letter of Intent (LOI) is a document that plays a crucial role in outlining the general terms and conditions of an agreement between parties before it is finalized. Although commonly used in real estate deals, LOIs can be utilized in various industries. While they are typically non-binding, certain provisions within the letter can be enforceable upon mutual agreement. However, it is important to note that the language used in the document plays a significant role in determining the enforceability of the letter.
The Purpose of a Letter of Intent
A Letter of Intent serves several key purposes:
Establishing Fundamental Business Deal
An LOI allows parties to negotiate and establish the key terms of a business deal, creating a mutual understanding. As a businessman, opting for a 2-6 page LOI can expedite the negotiation process, simplify complexities, and significantly reduce costs compared to directly proceeding to a purchase contract or lease.
Tying up Property
By incorporating appropriate provisions, a purchaser or tenant can secure an available site using an LOI. This provision ensures that the owner/lessor refrains from negotiating with any other party once the LOI is executed.
Determining Feasibility
The LOI serves as a litmus test to determine whether a deal can be made between the parties involved. If the terms outlined in the LOI cannot be agreed upon, considerable time and expense that would have been spent on futile negotiations for a larger and more complex agreement are saved.
Establishing Confidentiality
Confidentiality is a critical aspect of many negotiations. An LOI can incorporate measures to ensure that both parties agree to keep the negotiations confidential throughout the process.
Facilitating Good Faith Negotiations
Upon the execution of an LOI, parties are legally bound to negotiate the contemplated business transaction in good faith. This provision ensures that parties remain committed to the negotiation process.
Including Certain Binding Terms
While it is common for LOIs to be non-binding, parties must ensure that critical terms that they intend to be binding are not overlooked. These may include provisions such as confidentiality and exclusivity.
Addressing Critical Business Issues
To avoid complications during the negotiation of binding agreements, it is vital to ensure that the LOI covers all points that the other party deems material and critical. By addressing critical issues in the LOI, both parties can save time and prevent future conflicts during the lease or purchase negotiations.
Non-Routine Provisions
LOIs often include terms that are not of a routine nature. These provisions require careful review and consideration. For example, if a purchase agreement is intended to be sold "As Is" without any surviving representations, or if an offer to lease disclaims an operating covenant, such provisions should be included in the LOI to avoid misunderstandings.
Fundamental LOI Provisions
To ensure a comprehensive and legally binding LOI, it is highly recommended to involve an attorney during the negotiation stage. A signed letter of intent sets the foundation for further negotiations, and it is challenging to negotiate away from agreed-upon business or legal points. At a minimum, the following provisions should be included in a comprehensive LOI for purchase and sale agreements, as well as leases:
Purchase and Sale Agreements:
- Property description.
- Purchase price.
- Payment terms (if there is owner financing) and deposit.
- Closing date.
- Due diligence period and inspection rights.
- Contract contingencies.
- Deal-specific issues, such as rezoning or rollback taxes.
- Confidentiality.
Leases:
- Premises description.
- Term and renewal options.
- Rent, including increases.
- Other expenses.
- Use of the premises.
- Assignment and subletting rights.
- Parent company guaranty (if required).
- Exclusivity clauses in retail leases and some office leases.
- Co-tenancy requirements in retail leases.
- Tenant improvement allowance.
- Signage.
- Relocation rights.
- Confidentiality.
Remember, a thoroughly drafted and well-structured Letter of Intent can set the stage for successful negotiations and pave the way for a mutually beneficial agreement.