This article, written by attorney Eric Kilchenstein, was originally published by seacoastonline.com and an be found here.
Most readers with even transient experience with commercial real estate, or other business, matters are familiar with the concept of the letter of intent (also referred to in this article, and in common parlance, as an “LOI”). Without going into complexity beyond the appropriate scope and word limit of this article, an LOI in the commercial real estate world, as well as with other types of business transactions, outlines the material terms and conditions as agreed upon by the relevant parties before negotiating and entering into a more definitive agreement (usually either a lease or a purchase and sale agreement when it pertains to a commercial real estate transaction). While almost all mid-sized and large transactions are initiated with an LOI, a surprising number are light on detail needed and often are not forwarded to the parties’ attorneys or other trusted professionals until signed and are thereby lacking in terms and considerations that would have enabled a smoother and often quicker transaction if included and thereby negotiated before the LOI was finalized.
A book could be written on commercial real estate letters of intent but below are a few general considerations to fit the confines and general business readership of this article.
- Involve your attorney, and other trusted professionals, in the LOI negotiation. Whether the LOI involves the leasing or the purchase and sale of commercial real estate, get your organization’s attorneys and other relevant professionals involved early. Any experienced commercial real estate attorney can invariably tell you stories of fairly large and complex transactions being sent to them by their client with an LOI having already been negotiated and executed without their feedback and that thereby caused problems as the transaction proceeded. While most letters of intent are not binding in their entirety (more on this later) their purpose is to set out all of the material terms of the transaction and a discerning party on the other side of a deal will often not compromise, amend, or add to, the terms of an existing LOI. The more that can be negotiated early on mitigates the risk of the deal falling apart further down the line and it is most cost effective and productive to capture as much detail as possible in the LOI with the help of the perspective of not only a good and experienced commercial broker but also an experienced commercial real estate attorney.
- Make sure all issues critical to your organization or business are covered in the LOI. Piggybacking off the paragraph above, it is imperative that all issues that are important to your side of the transaction are covered in the LOI. The LOI is the roadmap to what is acceptable to both parties and it cannot be assumed that any material item not raised in the LOI, with exception of general customary matters that are ancillary to the type of transaction involved, will be acceptable to the other side. Take the time, and consult your experienced broker and attorney, on the issues that your side deems critical so as to include them in the LOI. In addition to your attorney and broker, consult your accountant and business team as needed and above all else make sure the LOI is as comprehensive as possible before signing. It takes a village, or at least the help of a commercial real estate attorney!
- Consider the possible binding effect of LOI, in its entirety or of certain terms. Often, in the haste of completing the LOI, the parties fail to consider 1) either the binding effect of the LOI as it is drafted, 2) the binding effect of certain terms of the LOI as it is drafted, or 3) fail to consider the need to draft the LOI so that certain terms of the LOI, or the LOI in its entirety, are binding. To be clear, letters of intent can be drafted so that the entire LOI is binding, the entire LOI is non-binding or certain provisions of the LOI are binding. This should be clearly stated in the LOI and leave no room for misunderstanding. Case law is filled with instances where one party mistakenly assumed a clause in an LOI was or was not binding. For instance, often it is the intent of the parties that the whole of the LOI not be binding but that a confidentiality or exclusive dealings provision are binding until a more definitive agreement, such as a lease or Purchase and Sale Agreement, are reached. However, this is often not clear which leads to misunderstanding and possible litigation between the parties. With the help of the consultation of your commercial real estate attorney and other trusted professionals, make sure that the desired binding obligations, if any, are clearly stated as so in the LOI and that the LOI is otherwise clear as to what is not binding, whether in part or in its entirety.
As with a lot of guest business columns, I realize the above sounds like an advertisement to use the author’s professional services; in this case that of a commercial real estate attorney. That said, in the world of commercial real estate and when it comes to letters of intent, I can tell you after over twenty years of first-hand experience that involving your commercial real estate attorney, in addition to an experienced broker and other professionals as needed (as all have different skill sets), at the letter of intent stage of the transaction will pay off exponentially in time, effort and savings down the road and almost always leads to a quicker, less adversarial and less expensive transaction.