LOIs, or Letters of Intent, are commonly used in commercial real estate transactions as a preliminary step before entering into a formal purchase agreement or lease.
An LOI is a document that outlines the basic terms and conditions that both parties intend to include in the final agreement.
What does an LOI do?
An LOI serves as a roadmap for negotiations and helps both parties understand each other’s expectations and goals before they invest significant time and resources into drafting a detailed contract. If you’re not on the same page with the other party, an LOI will generally also reveal the issues ahead – or indicate that it’s time to move on to other prospects.
Information in an LOI usually:
- Clearly states the names and contact information of the parties involved, such as the buyer/tenant and the seller/landlord.
- Describes the property, including its location, size and any specific features that are relevant to the deal.
- Specifies the proposed purchase price if it’s a sale, or the proposed rent and any applicable terms if it’s a lease.
- States whether a deposit or earnest money will be required, the amount and the timing of payment.
- Outlines the due diligence period, during which the buyer or tenant will conduct inspections and any necessary research on the property before making a final commitment.
- Addresses how costs related to inspections and any other actions related to the property will be allocated between the parties.
- Lists any conditions (contingencies) that have to be met for the transaction to move forward, such as obtaining financing or zoning exception approvals.
- Includes relevant terms such as the closing date for a sale or the lease term for a lease agreement.
- Clearly specifies whether the LOI is intended to be binding or non-binding. (In most cases, LOIs are non-binding, but certain provisions (like a confidentiality agreement) might be binding)
In some cases, an LOI might also include a provision that grants a period of exclusivity to the potential buyer/tenant, preventing the seller/landlord from negotiating with other parties for a while. It’s also important to note that, even though LOIs are typically non-binding, they do convey the expectation that the parties intend to negotiate in good faith – so a failure to do so can result in legal action.
Commercial property transactions are very different from residential property transactions. Learning more about the process and seeking legal guidance proactively can help you protect your interests.