A Commercial Letter of Intent (LOI) is a document that outlines the intentions and a baseline understanding between the parties to a commercial real estate transaction. The LOI is typically nonbinding and is sometimes called an “agreement to agree.” Given the nonbinding nature of the document, I often hear the question, “If the LOI is nonbinding, why use it at all?” Here are five reasons why the LOI can be helpful in a commercial real estate transaction.
- Commercial transactions can be complex, and the LOI can help create clarity and understanding between the parties. The Letter of Intent outlines the fundamental terms and conditions of a proposed transaction. The letter helps clarify both parties’ intentions before formalizing a binding contract.
- The LOI can be a powerful negotiation tool. Instead of starting a negotiation with little to no information or understanding, the LOI allows the parties to negotiate with a framework for agreement already in place.
- The LOI can provide certain legal protections. While many of the terms and conditions in the LOI are not binding, certain provisions, such as confidentiality and exclusivity clauses, can be present and offer such protections to the parties involved.
- The LOI can provide for certain timeframes and deadlines. LOIs often include timetables for the completion of due diligence periods, negotiation periods, and other key milestones to finalizing a transaction. Setting these time periods and deadlines in the LOI can prevent time wasted in the future.
- The LOI can mitigate risk. By addressing key issues in the LOI early in the process, potential deal-breakers can be identified early. This creates less likelihood of a default or breach of contract occurring later, which can result in a party suffering damages and pursuing legal action.
At Virginia REALTORS®, we offer two Commercial Letter of Intent Standard Forms—one for leases and one for purchases. These forms create non-binding LOIs. If you wish to make certain terms binding, we recommend contacting an attorney to help you draft such terms. Also, if you have general legal questions about LOIs, you can always use the Virginia REALTORS® Legal Hotline.