Letter of Intent in Real Estate Transactions

Letters of Intent in Real Estate Transactions

A letter of intent (“LOI”) can be an extremely helpful tool in real estate transactions and leasing, especially commercial deals. Because commercial real estate transactions inherently involve a complex process that can be overwhelming at any one stage from early negotiations through closing, a written notation of the parties’ key foundational understandings can help the deal actually make it to closing. 

What is a letter of intent in real estate?

An LOI is an essential document that outlines the basic terms of a potential commercial real estate transaction or lease, including the identification of the subject property, the initial purchase price or a range of possible pricing, approximate closing/start dates, and key issues which are unique to the property or the parties. LOIs are usually intended to be non-binding documents that precede the final contract, functioning as a blueprint for the parties, agents, brokers, and bankers involved in the transaction. 

LOIs are often viewed as similar to non-binding term sheets, but both can be enforceable if not drafted properly, as discussed below.

Can I use a LOI for a commercial purchase and sale?

Yes! The primary use of an LOI is in commercial real estate transactions. These transactions are more varied and less standardized than residential real estate transactions, and therefore there are many more benefits to using an LOI in the less predictable circumstance. In Oklahoma, LOIs tend to be used most often in certain types of transactions, including 1031 tax-deferred exchanges and commercial building transactions with purchase prices exceeding a few million dollars.

Can I use a LOI for a commercial lease?

Yes! The terms of commercial leases are highly dependent upon the location of the property being rented, the types of structures involved, zoning, the intended use of the leased premises, and more. Before spending time or money negotiating a long term and multi-page lease with the landlord or prospective tenant, it is often extremely beneficial to begin the commercial real estate leasing process with an LOI.  

A note on enforcement of LOIs as written agreements:

While an LOI is generally considered a non-binding document, some courts may interpret it as a written agreement and enforce it accordingly. This means that parties should be cautious when drafting a letter of intent, ensure that all terms and provisions are clearly defined and agreed upon, and be aware of the potential legal liability that can arise from a poorly drafted or ambiguous LOI. Binding provisions, such as clauses of confidentiality, non-disclosure, or exclusivity, can create enforceable contractual obligations for both parties.  

Therefore, it is crucial to seek competent legal advice and guidance when preparing or negotiating a letter of intent for a commercial real estate transaction. Experienced and knowledgeable legal counsel can help mitigate the risks associated with using a letter of intent and ensure a successful transaction. To discuss your LOI in a commercial transaction or lease, contact Avenue Legal Group today.

Top Benefits of Using a Letter of Intent in Real Estate Deals:

1. Clarity in Negotiations. One of the primary benefits of an LOI is that it provides simplicity and clarity in negotiations. The terms and conditions identified in the LOI as being generally acceptable targets for the deal help keep parties aligned while the more minor terms are discussed, the property is inspected and maintained or improved before closing, and the final financial details are arranged.   
2. Binding of Important Terms. Many parties use non-disclosure or confidentiality language in their LOI, which can keep the deal confidential with the typical exceptions of a party’s advisors and agents, rather than using a separate non-disclosure agreement (NDA) or similar document. Ultimately, these provisions are designed to help protect the interests of the parties and prevent any leaks of sensitive information. For buyers or prospective tenants, it may be wise to also insist on an exclusivity clause, which would prevent the seller/landlord from marketing the property while the LOI is in effect to avoid a third party from driving up the price or effectuating a deal while the buyer/tenant is expending resources. 
3. Time and Cost Savings. A letter of intent can save both parties time and money in the long run. By outlining the terms and conditions of the transaction upfront and before expending resources developing and negotiating a purchase and sale agreement (PSA) or commercial lease, the parties can avoid unnecessary setbacks and disputes later in a transaction when the time and cost expended are significant. 
4. Starting Due Diligence Early. Due diligence is an essential part of every real estate transaction and lease. A well-structured LOI will allow the buyer/tenant to begin the research process early to determine whether the property will be sufficient and acceptable for their needs.

Don’t be the only party without experienced counsel when it comes to commercial letters of intent.

Avenue Legal Group helps clients navigate any and all stages of commercial transactions throughout Oklahoma, or for Oklahoma-based clients transacting in other states. Contact Avenue Legal Group to ask questions or discuss how we can help with your commercial transaction, starting with a well-crafted letter of intent.