Buying or selling property can be one of the most important transactions a business undertakes. It can also be a complex process, with many opportunities for things to go wrong and cost money. Frequently, a letter of intent is the first step in the process and it’s important to understand its purpose and what it should contain.
What is a letter of intent?
A letter of intent (LOI) usually comes up fairly early in negotiations to buy/sell commercial property. Perhaps some informal discussions have taken place but, typically, the parties are not far into the transaction. An LOI is drafted to ensure the parties are on the same page, so that neither feels they are wasting their time and resources as the negotiations continue and grow more serious.
What’s in a letter of intent?
An LOI often begins by identifying the parties and the purpose of the letter. It can include the property being discussed and preliminary pricing information. If the parties are contemplating deadlines for certain actions to be performed, they too can be included. Since the overarching purpose of an LOI is to help the parties move forward with one mind, it can include any provisions which they believe will assist that effort.
There are some specific provisions the parties will often find necessary. Nondisclosure agreements can protect the confidentiality of the negotiations. Noncompete agreements can help ensure one party doesn’t use the negotiations to simply take advantage of the other. And an exclusivity provision can prevent the parties from negotiating with other buyers or sellers until the present business is concluded.
Is a letter of intent binding?
Generally, with the exception of specific provisions intended to bind the parties while negotiations are ongoing, LOI’s are not binding. However, it is important to include language in the LOI specifically stating that the parties do not intend the LOI to be binding. Without this, it is possible that a California court could view the LOI as a contract and enforce it, even if this was not the original intent.