Are you planning to purchase or lease commercial real estate? Negotiating a letter of intent (also known as an LOI) will be one of the first and most important steps you take on the way to owning or leasing your new property. To help you through that process, here are six quick tips on drafting real estate letters of intent:
1. Make sure your LOI is non-binding.
If you’re not careful, that letter of intent you wrote in a hurry at midnight could become your purchase and sale agreement. To make sure that does not happen, always add language to your LOI, similar to the following, that makes it clear that your letter of intent is non-binding.
This Letter of Intent: (a) is intended to be a non-binding expression of the principal terms and conditions on which the parties are willing to enter into contract negotiations for a definitive written real estate purchase and sale agreement with respect to the property described herein; (b) is not intended to be a legally binding contract or an agreement to enter into a legally binding contract; and (c) is not intended to create any obligations to any third party, including, but not limited to, any broker.
2. Keep your LOI simple.
Don’t use your LOI to work out every term of your deal. Instead, use your letter of intent to outline basic business terms, such as the price, the amount of earnest money and the closing date. Avoid including long, detailed paragraphs with specific legal language regarding the rights and duties of the parties. These kinds of details should be resolved at the contract negotiation stage. After all, why should you spend hours arguing about the details of the default provisions and the circumstances in which the contract can be assigned if you have not even agreed on a purchase price?
3. Include a deadline for the seller or landlord to sign your LOI.
Take control of the timing of your purchase or lease right from the beginning. Avoid the trap of sending a signed LOI, then waiting and wondering if the seller or landlord will ever get back to you. Pick a reasonable deadline and include it in your LOI, using language similar to this:
This Letter of Intent may be accepted at any time prior to 5:00 p.m. Central Standard Time on August 10, 2014, after which time this Letter of Intent shall be deemed to have been rejected and shall become null and void.
4. Include any other important deadlines in your LOI.
Do you need time to obtain financing for your purchase? State that your obligation to purchase will be contingent upon your ability to obtain financing within a stated number of days after the contract (not the LOI) is signed. Do you need to obtain any special municipal approvals in order to use the property as you have planned? State that your obligation to purchase or lease the property will be contingent upon your ability to obtain those approvals by a certain date.
5. State that your attorney (not the seller’s) will draft the purchase agreement.
It is a big advantage to be the party who writes the agreement, rather than the party who reviews an opponent’s agreement. While landlords usually insist on drafting the leases for their buildings, in a purchase and sale, you can secure the advantage of drafting the contract by stating, in the LOI, that your attorney, not the seller’s, will draft the purchase agreement, using language similar to the following:
Within ten (10) business days after execution of this LOI by both Purchaser and Seller, Purchaser’s attorney shall deliver a draft of a proposed purchase agreement to Seller’s attorney.
6. Ask your attorney, not your broker, to prepare the LOI.
Brokers often insist on drafting letters of intent, but brokers are not attorneys, and, a broker-drafted letter of intent often creates problems for a purchaser or tenant. Although letters of intent are usually non-binding, it is often difficult for your attorney to argue that your purchase agreement or lease should not include a provision specifically required by the broker-drafted LOI you just signed. If you do not have your attorney draft your LOI, you should, at least, have your attorney review your broker’s LOI before it is executed. This brief review by your attorney may well save you both time and money when you negotiate your lease or purchase and sale agreement.
How The Gauthier Law Group can help: Need help with a real estate letter of intent? The Gauthier Law Group can quickly and efficiently prepare, or review, a letter of intent for you. We also understand that time is of the essence in all real estate transactions, so we review or prepare most letters of intent within one business day of a client’s request.
This article was written by Janice L. Gauthier, Esq. Ms. Gauthier has an A.B., cum laude, from Harvard University and a J.D, cum laude,. from Harvard Law School. She is a real estate lawyer and the owner of The Gauthier Law Group, LLC, a boutique real estate law firm in Milwaukee, Wisconsin, that represents international, national, regional and local real estate owners, developers, sellers, buyers, borrowers, lenders, tenants and landlords in the Greater Milwaukee, Chicago and Madison Areas, as well as in other parts of Wisconsin and Illinois. You can contact Ms. Gauthier at 414-270-3855, ext. 101 or by email. To learn more about Ms. Gauthier’s background and experience, please review her Google and LinkedIn profiles.
© 2014 The Gauthier Law Group, LLC. All rights reserved.
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