When it's a binding agreement. Yes, it happens. But please don't let it happen to you. Uninformed parties with the best intentions can find themselves in a binding transaction without a way out.
A letter of intent – or LOI - is a road map for your commercial real estate journey. It helps plan a course by establishing important deal terms, marking stops along the way in the form of contingencies to completion or closing, and considering necessary breaks too, such as risks or obstacles to be addressed before reaching your ultimate destination. All of these considerations can be memorialized in writing in the form of a Letter of Intent.
So, what is the purpose of a Letter of Intent?
Preparing an LOI gives the parties time to discuss, evaluate and prioritize material provisions and reach a "meeting of the minds" on essential deal terms. It helps the parties minimize their initial excitement and take a rational, contemplative approach to their deal. After all, if the parties can't reach consensus on the basic terms, why make the journey?
As a result, a Letter of Intent often will enable the parties to save time and money.
But, is an LOI an Expression of Intent or a Binding Agreement?
An LOI should be an expression of intent to enter into a transaction. Once the parties have agreed in principle to the terms for the transaction, those terms can be written by an attorney or broker into a letter of intent. The parties must, however, recognize that there may be other material terms or legal requirements to be negotiated to protect the parties and formalize the deal. Those can be included in the final binding agreement.
The good news is that at this stage, the parties can still change course. In fact, until a formal binding agreement is signed and delivered, the parties should feel free to change their minds on any particular term or on the entire deal. Be mindful, however, that if the letter of intent contains all or enough of the material terms necessary to complete a transaction without necessary disclaimers, one could find himself or herself in a deal that they never intended to enter into.
To avoid having your LOI construed as a binding agreement, it must clearly state that it simply is an expression of the parties intent to enter into a formal agreement at a future date, and that the parties do not intend it to be a legally binding agreement.
Of course, this only touches the surface. There is much more to discuss about letters of intent and I look forward to sharing more on this subject in future blog entries.
More information is available at my blog at www.bfvlaw.com
As always, please let me know if I can help.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.