Begin As You Mean To Go: The Letter of Intent

In this article

Nothing perturbs a transactional attorney more than when a client delivers a letter of intent and a draft contract that bear little to no resemblance to one another. Though letters of intent are non-binding in most jurisdictions, parties who rush headstrong into signing a letter of intent (LOI) miss a critical opportunity to work out key legal terms in addition to those terms that include a dollar sign. Taking the time to consider the following items when writing letters of intent can mean less stress and better results when it comes time to draft a contract:

Who Is Drafting the Contract?

While most real estate transactions mutually benefit both parties, the party initially drafting the sales contract often has the upper hand in terms of the overall deal structure. Whether buyer or seller, the privilege of the initial draft often yields more control over valuable deal points such as representations and warranties. For those who are fee sensitive, having the ability to present the first draft may afford an opportunity to use a widely-known form contract, such as those blessed by your state’s real estate commission, which typically require less time and negotiation than a custom craft agreement.

Due Diligence Delivery Items and Special Relationships

Depending on your needs for (as buyer) or history with (as seller) a property, you may be looking to receive or provide particular information about the property during the diligence period. As a seller, you may want to avoid disclosing 20 years’ worth of old paperwork relevant to the property (and who really wants to see every water heater warranty you have crammed into your file cabinet anyway?). As the buyer, you may want the opportunity to review any past environmental studies completed on the property.

Whether acting as buyer or seller, you may have preferred third party vendors you like to deal with, such as a reliable surveyor or a title company that offers fantastic rates. I highly recommend specifying these parties in your LOI to limit the chances of argument during contract negotiations.

Closing Documents and Fees

Advance discussion of closing matters can mean time – and cost-savings for deal points that may be critical to acquiring or divesting property on your own terms. Strongly consider specifying the form of deed that will be used (i.e. bargain and sale, quitclaim, general warranty), as well as the distribution of closing fees such as title and survey costs and transfer taxes.

Special Deal Considerations

The LOI for any transaction that involves special moving pieces, such as the necessity of a party granting an easement, a license, or perhaps the transfer of large amounts of personal property, should include a substantial description of the property or rights involved and the major deal points relevant to that conveyance. For example, if the seller plans to reserve an easement in the deed, the LOI might include the legal description or dimensions of the easement area, the duration of the easement, and the particular use required.

Confidentiality

In some deals, one or both parties may require for business reasons that the deal terms remain private. In these cases, binding the parties to confidentiality in the LOI is highly recommended. Make sure that the verbiage used is broad enough to cover the parties’ needs (i.e. not just the price to be paid, but perhaps even the existence of a deal), but permissive enough to ensure that appropriate advisors, such as legal counsel and lenders, have full rights to deal terms as needed to complete their work.

General Considerations

If you are a repeat player in acquisitions and divestments and have developed standardized language to suit particular needs, consider using the exact verbiage that will appear in your contract in the LOI. This tactic often cuts out later negotiation on these points.

Letters of Intent are frequently used to display a party’s seriousness about a transaction. As a result, it’s appropriate to spur on your counterpart’s response by including an “acceptance date” in your letter.

And finally, an often overlooked point: a good LOI will include sufficient information about the investment property itself that someone who has never talked directly with the buyer or seller can still understand what piece of property is up for sale. A property address is not always sufficient. Attaching a legal description is best, though if only a portion of a larger property is being sold, a legal description of the parent tract and a depiction of the smaller parcel and rough dimensions or acreage is a good start.

Photo: propertysnaps

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.