The Laurex Process: Investment
Commercial Letters of Intent
By Reid Wilson
Commercial real estate transactions can be complicated and
time-consuming. Real estate professionals looking for ways to expedite deals
should become familiar with the letter of intent - a tool that can eliminate many
of the speed bumps on the road between an offer and a legally executed
A letter of intent (LOI) is a document outlining preliminary agreements
("understandings") between parties in a transaction. It should not
be a legally binding contract. Rather, it describes important business terms.
These include timing, monetary terms, financing, deal contingencies, risk
allocation, form of documentation and who will prepare the documentation. The
parties involved would be unwilling to invest further time, energy and money
in negotiating a deal if these understandings were not clearly spelled out.
Purpose of LOI
A well-drafted LOI moves a transaction toward a legally
binding contract by reducing misunderstandings between the parties and
binding them psychologically and morally to the deal.
LOIs can be used to determine if property not
currently listed for sale is available and whether a particular price range
is generally acceptable to a seller. They also make it possible for attorneys
representing the parties to quickly and efficiently negotiate and draft
formal, legally binding documentation by providing a written outline of the
deal and detailed information about the parties involved.
The Texas Real Estate Commission, Texas Association of Realtors and the State
Bar have not created LOI forms. Consequently, LOIs are typically drafted in the form of a letter between
brokers or agents for the parties. The majority of the text usually is a list
of paragraphs discussing material business terms, often numbered and with
headings. In some cases, an LOI is a simple outline of agreed upon terms,
signed or initialed by the parties.
The format of an LOI is not critical as long as it is clear, concise,
unambiguous and nonbinding. Because they are shorter and more informal than a
binding contract or lease, LOIs can be drafted
quickly. The length of the document depends on the complexity of the deal.
Most LOIs are drafted by
the broker or agent representing the buyer in a sale transaction. Either the
tenant or landlord in a leasing transaction may draft an LOI. Drafting an LOI
does not constitute the unauthorized practice of law because LOIs are nonbinding.
Because attorneys are routinely left out of the drafting process, legal fees
and delays can be avoided. However, complex LOIs are sometimes drafted by attorneys.
LOIs may be effective in any commercial transaction
but may not be appropriate if the subject matter is overly complex or
legalistic. In such cases, the parties should skip the LOI and proceed
directly to drafting a legally binding contract.
Brokers and agents should not draft a legally binding LOI
or advise a client to execute a binding LOI. If a binding agreement is
desired, the client should be advised to consult an attorney or proceed
directly to drafting a contract. A seller or landlord may negotiate several LOIs simultaneously but should not execute duplicate LOIs.
Because LOIs are
nonbinding, who signs them is not important. Typically, an LOI is signed by
either the principal or the principal's broker or agent.
Either party to a nonbinding LOI may terminate
negotiations at any time, without reason, except when binding provisions such
as the agreement to negotiate in good faith during a specified period (see
next section) are included. Except in unusual circumstances in which the
parties' conduct is inconsistent with the nonbinding character of the LOI,
there are no legal ramifications for failing to comply with a nonbinding LOI.
Relations with other parties in the transaction will likely deteriorate,
however, and termination may also affect a broker's or agent's reputation in
the commercial real estate community.
A poorly written LOI, particularly one with ambiguous
terms or lack of clear, nonbinding language, may actually impede a
transaction or cause the parties to waste time on a transaction that has
little chance of closing. A well-drafted LOI should include the following
Title. The LOI should be titled "nonbinding letter of
intent" or "letter of intent." Avoid "letter of
understanding" or "letter of agreement." Other titles
sometimes used are "term sheet" or "transaction outline."
Nonbinding character. The LOI should include a provision
stating specifically that the document is not legally binding, preferably in
capitalized, underlined or bold text. This provision should be located
immediately above the signature lines. Ambiguous language such as
"subject to legal documentation" or "subject to attorney
approval" should not be used. Such language may result in a binding
Separation of binding and nonbinding provisions. Any legally
binding provision included in a nonbinding LOI, such as an agreement to take
the property off the market, should be placed in a separate section of the
document to make it clear that it is an independent, legally binding
obligation. Courts evaluate the intent of the parties when determining
whether a provision is legally binding, so clarity is essential.
"No shop" provisions. The seller or landlord might
agree not to seek other buyers or tenants for the designated property while
the parties negotiate a binding contract. This provision should be in effect
for the same term as was set for negotiating in good faith (if applicable). A
provision to remove the property from the market or to prohibit specific
types of marketing might be included.
Details of legal documentation. The LOI may state:
attorney will draft the legal documentation
the first draft will be completed
whom it will be distributed
form of the contract or lease to be used (TREC or TAR, for example) and
goal or deadline for completion of negotiations or signing of the
Distribution list or cast of characters. A list of parties
involved in the transaction and pertinent information about the parties may
be included in the final LOI. Company names, individual contacts, mail and
street addresses, phone numbers, fax numbers and e-mail addresses are
Used appropriately, LOIs can
make commercial real estate transactions smoother for real estate
professionals and their clients.
Article Provided by:
Wilson, Cribbs & Goren