One of the first steps in making a deal, especially in real estate, is the Letter of Intent (LOI). Parties to a prospective deal will often sign a LOI to set the general parameters of the contract that will govern the deal that has not yet been agreed upon. For tenants in lease negotiations, an LOI is often the first tool they use in a lease negotiation.
However, the LOI also presents many issues and traps for the unwary. Some questions that parties should ask themselves before signing a LOI are as follows:
- What do I want out of this prospective deal?
- How detailed should the LOI be?
- What terms should I include in the LOI?
- How much flexibility do I want in contract negotiations?
- Will the rights of any third parties, like brokers or my affiliates, be affected by the LOI or the resulting contract?
- Will the LOI expire if it takes too long to make a deal, and if so, when will it expire?
- Do I want an LOI to be legally binding?
- What about my written communications that I have already had with the other side? (Text messages may be binding in some circumstances.)
These questions are not exhaustive, and the answers to these questions often depend on the parties’ business and legal objectives related to the prospective deal, and how the parties would like negotiations to proceed. For instance, on one hand, a detailed LOI may make negotiations go more smoothly and quickly because the parties may have already agreed on many key terms and included those terms in the LOI. But, on the other hand, a detailed LOI may be more likely by court to be seen as “binding,” which may not be what either party wants.
Lerch Early’s business and real estate attorneys aspire to understand clients’ objectives to help them navigate key steps, such as an LOI, when making a deal.