Originally published in the Shenandoah Valley Business Journal
Authored by Tim Reamer and Todd Rhea
Investing time, effort, and resources into a commercial real estate deal that falls through is frustrating to buyers and sellers alike, but it is frustration that can be largely avoided. Before jumping headfirst into a commercial lease or purchase agreement; consider a non-binding letter of intent that allows both parties to communicate, and negotiate, the most significant aspects of the deal before incurring the expense of third party due diligence or committing time to transaction in which the parties cannot find common ground.
What is a Letter of Intent?
A letter of intent (LOI) outlines the key terms of a proposed commercial lease or purchase transaction. It is not as comprehensive as a lease or purchase agreement, but a well-drafted LOI attempts to establish the terms and structure of the deal, ensuring that both buyer and seller are on the same page. When crafted correctly, a LOI should contain the general guidelines of the transaction, allowing the seller and buyer to come to agreement on preliminary economic and business aspects of the deal. A typical LOI runs 2-4 pages, and is much more concise than a final Purchase Contract or Commercial Lease, which can often be in excess of 20 pages in length.
Why Use a Letter of Intent?
Many commercial transactions are extremely complex, requiring significant amounts of time and assistance from third party professionals such as brokers, attorneys, appraisers, surveyors, and engineers. An LOI should be designed to outline key aspects of the transaction, bringing any potential issues to the forefront to ensure all involved parties can come to agreement on key terms before engaging many of the services provided by these professionals. Perhaps more realistically, the LOI permits both parties to fully understand the obstacles, make an informed decision regarding the viability of the transaction based on the findings, and if necessary, offers a way to exit the negotiations without significant hardship or penalty. In the event both parties can reach agreement during the LOI stage, the document offers the added benefit of serving as a record of the exact terms for transfer to the lease or purchase agreement.
What Should A Letter of Intent Include?
While there’s no such thing as a standard LOI, as each commercial purchase and lease transaction has its own particular nuances, a few items should be included:
Sellers or buyers considering a LOI should take steps to minimize language that would inadvertently create a binding agreement. Despite the intent of an LOI to be non-binding, once parties reach what they believe are the basic terms of the deal, expectations can become set, and create grounds for litigation should the deal fail reach the final agreement stage. An LOI should always contain explicit language stating to the effect.
Avoiding Unintended Consequences with a LOI
This Letter of Intent is intended only to set forth the salient terms upon which a binding contract for the purchase of the property (or Lease) can be entered into by the parties. This Letter of Intent does not create and is not intended to create any binding contractual obligations between the parties, and the parties shall only be bound by the terms of a subsequent written contract to be entered into by the parties.
Regardless of document titles or personal assumptions–every LOI should clearly provide language that provides this protection. If the LOI doesn’t do that, then you are simply inviting unnecessary difficulty.
An LOI may be treated as binding to certain issues that remain even if the deal isn’t completed, such as, exclusivity of negotiations, expense allocation, the requirement to negotiate a final agreement in “good faith” and confidentiality. A properly drafted LOI makes it clear what issues are to be binding, as the majority of the document is not intended to create binding legal obligations between the parties unless and until a full Purchase Contract or Lease is fully negotiated and signed. To remove any ambiguity as to mixed provisions within an LOI, a better practice may be to draft separate agreements relating to expense sharing and/or enter into a separate Confidentiality Agreement. Standalone Confidentiality Agreements are standard practice in commercial negotiations prior to the disclosure of detailed property or financial information.
In summary, even a “bare-bones” LOI should be complete, consistent, unambiguous, and in line with the involved parties’ objectives. To avoid misinterpretation, both buyers and sellers may want to have attorney review of their LOI. When correctly drafted, an LOI can save significant time and money, prevent unintended consequences, and serve to provide a smoother basis for the commercial real estate transaction.
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- About Tim Reamer | Your Position Will Always Be Informed and Well Represented
Tim Reamer is a Commercial Realtor specializing investment real estate, tenant/landlord representation, and general commercial brokerage throughout the Shenandoah Valley for Cottonwood | Commercial.
Todd C. Rhea, Esq. is a local attorney and shareholder the firm of Clark & Bradshaw, P.C. with a practice area concentrating in commercial real estate, including extensive experience in land use and zoning matters.