The Commercial Real Estate Letter of Intent
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There are several steps in the process of buying or leasing commercial real estate, from searching for properties to finding financing, negotiating contracts, and closing deals. Drafting and sending letters of intent (LOI) is an important, yet often-underappreciated component of these processes that you shouldn't overlook.
Here, we'll cover everything commercial real estate investors should know about real estate letters of intent. We'll discuss the purpose of sending a real estate letter of intent and discuss the obligations that letters of intent carry.
Let's get started.
What Is a Letter of Intent?
In the context of commercial real estate deals, a letter of intent is a document that outlines the general terms and conditions of a given real estate sale or lease. LOIs are common for larger real estate deals and signal one party's willingness to continue with the real estate transaction according to the described conditions.
LOIs are not formal, legally binding documents, so they can differ in structure and content. However, the typical LOI is written for the following purposes.
- Outline the basics of the deal, including key terms/clauses, timelines, and lease structure (i.e., net lease vs. gross lease);
- Determine lease concessions (e.g., rent abatement, security deposit waivers, tenant improvement allowances, etc.);
- Establish that the seller won't negotiate with another buyer;
- Determine appropriate property uses;
- Delineate co-tenancy clauses and considerations;
- Ensure confidentiality between the two parties; and
- Establish non-routine terms and provisions that are not part of standard contracts.
Whether you're buying or selling real estate, an LOI is the first step toward creating a formal contract. The next step would be hammering out specific details and drafting a formal, binding contract.
Why Use a Letter of Intent?
The point of an LOI is to make sure that the buyer/renter and seller/landlord are on the same page. Real estate transactions can take a lot of time and resources to put together. An LOI determines that both parties are in general agreement, so they can take the next steps in the sales or leasing process.
When one party sends an LOI, the other party can modify and send it back until everyone is in agreement. The next step is drafting a formal commercial sales or commercial rental contract. LOIs are useful for letting buyers and sellers know whether a transaction is worth pursuing so they don't misallocate their time.
Can You Back Out of a Letter of Intent?
LOIs are not legal documents, so they are generally not binding. That means that either party can back out at any time they wish. Even if you've signed an LOI, that doesn't mean that you're locked into a transaction. One party might wish to back out if the property's real estate financials take a negative turn or funding doesn't come through.
However, specific parts of an LOI may be legally binding, regardless of the larger contents. For example, a non-disclosure agreement might be legally binding even if one party ends up backing out of the deal. Similarly, a right of first refusal may be legally binding.
Whether or not a particular section of an LOI is legally binding depends on the specific language and context of the agreement, as well as the conduct of the two parties. If there is a dispute, courts can determine whether an LOI is binding or not.
Who Prepares a Letter of Intent?
Generally speaking, real estate agents and brokers draft LOIs. However, it is generally good practice to have a real estate lawyer look over any LOI to ensure that the terms are clear and won't require revision in the future.
A real estate lawyer can also help you avoid phrasings and terms that could lock you into a legally binding contract that you weren't looking for in the first place.
Should You Write a Letter of Intent Yourself?
You can write the first draft of a real estate letter of intent yourself, but we highly recommend working with your real estate team to go over and finalize the document.
Below are some general tips to keep in mind when writing:
- Structure the letter of intent like a letter—with a greeting, intro, body, and signature;
- State the main reason for the LOI in the first paragraph;
- Clearly state the names of all involved parties, including buyers, sellers, agents, and other relevant individuals;
- Include a general description of the property in question (i.e., square footage, address, lot size, etc.);
- Include information about the expected closing date, closing costs, and any financial lenders; and
- End with a closing statement and add a request for the other party to add their signature.
When in doubt, the more details you can provide, the better. The more precise you are with a letter of intent, the less time you'll have to spend defining and putting together the actual contract.
Are Letters of Intent Necessary?
No, LOIs are not necessary to buy or sell commercial real estate. You can simply present a completed transaction contract without a prior real estate letter of intent.
LOIs are most useful in situations where real estate contract terms can be highly variable. As such, LOIs are much more common for commercial real estate, as residential real estate terms are more uniform and regulated.
Commercial leases, in contrast, are much more flexible, so an LOI is a useful tool to provide a basic outline of the deal that the involved parties can refine.
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