The Letter of Intent to Purchase or Sell


Commercial Real Estate Toolkit

The Letter of Intent to Purchase or Sell

Prior to entering into a binding commercial real estate purchase agreement, the parties can save time and money by negotiating the key business points of the transaction through a document known as a “Letter of Intent”, “Term Sheet” or “LOI”.  The LOI typically contains a limited set of terms that the parties would like to see their attorneys incorporate into a purchase and sale agreement. These preliminary documents are often drafted, negotiated and signed prior to the involvement of the parties’ legal counsel and may be drafted by or with the assistance of real estate brokers. 

It is important to include in an LOI a provision that makes it clear that the document is not binding on either party. If the LOI lacks clear non-binding language, then a court can enforce the LOI against either party with catastrophic results.  Although the LOI is non-binding, attorneys will usually draft the purchase and sale agreement consistent with the LOI and only negotiate provisions that are not covered by the LOI. An attempt to change an agreed upon term after an LOI is signed is usually not well taken by the counterparty.

While an LOI can cover both business and legal type contract provisions, most real estate purchasers and sellers should limit the document to setting forth only the primary business points and leave the legalese to the lawyers. However, sophisticated real estate purchasers will often make offers using an LOI that was drafted by their legal counsel and may contain complicated legal provisions.  

An LOI should contain, at a minimum, the following: (1) a description of the property; (2) the price; (3) the names of the purchaser and the seller; (3) the amount of earnest money and whether it is refundable; (4) the length of the due diligence period; (5) contingencies that must be satisfied for the earnest money to become non-refundable and for closing to occur; (6) the time period or date for closing; (7) which party must prepare the initial draft of the agreement; and (8) the identity of the real estate brokers involved and which party is responsible for paying the brokerage commission. Other topics frequently covered by LOIs include matters of title and survey, real estate tax prorations, and the allocation of certain closing costs amongst the parties. While there will be many other terms and provisions to negotiate in a binding real estate purchase agreement, the parties will be best served to negotiate and draft those provisions with the guidance of an experienced commercial real estate attorney.

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