Many real estate and lease transactions begin with a letter of intent (LOI). An LOI is supposed to be a non-binding expression of interest between a buyer and seller of real estate or a landlord and tenant. In a perfect world, the LOI should outline, in as much detail as possible, the salient business terms of the proposed transaction. These would include the parties, purchase price or rent, closing date or lease term, contingencies, due diligence period, financial accommodations such as tenant improvement and who is responsible for closing and other expenses. However, LOIs often are bare bones and leave many business points to be negotiated with the final contract or lease. In these cases, what was the purpose of the LOI in the first place?
Sometimes, clients and brokers ask my input on preparation of LOIs. When they do, I try to make them as detailed as possible to that when I prepare the contract or lease later, I don’t have to re-negotiate. More often, I am given a signed LOI and asked to prepare the contract or lease or worse, negotiate someone else’s document. These LOIs regularly have missing or incomplete essential terms or ambiguities. Therefore, we have issues that will have to be negotiated at the contract stage that the client and perhaps the broker intended to have put to rest with the execution of the LOI.
Another pitfall to LOIs is a negotiating strategy some people like to use. When I include a term in a draft of a document that the other side might not like, a common response is “that wasn’t in the LOI”. These “strict constructionists” can’t honestly believe that a non-binding LOI acts as list of exclusive terms of the deal. Similarly, if a client wants to modify or even tweak a term, the obstructionist won’t allow it because “that’s what the LOI says”. People get too hung up on the 4 corners of the LOI, they ignore the provision that says it is non-binding or they just don’t want to make a deal. Circumstances change between the LOI stage and the final contract. The parties have had an opportunity to do a bit more due diligence, to talk with their partners, attorneys, bankers and other experts. They have a more complete understanding of what needs to go in the final, binding deal. The LOI is designed only to be a road map. If one party gets too stuck on every word in the LOI, the deal will not get signed.
LOIs can be valuable tools, but only if they are drafted with the appropriate detail and only if the parties understand that until the contract is signed, nothing is final. If they are used otherwise, they can be costly and an obstruction to completing potentially valuable deals.