Strategic Tool

Letters of Intent (“LOI”) are often seen as a swift and cost-effective method of gauging whether the parties discussing a proposed transaction have reached a consensus on material terms to warrant proceeding to drafting and negotiating definitive agreements. While LOIs are appropriate for nearly all commercial real estate transactions, this article will focus on real property acquisitions and leasing. 

Format

LOIs are typically styled as correspondence from the buyer’s or tenant’s broker to the seller’s or landlord’s broker.  The format isn’t necessarily important so long as the content is clear, concise, and non-binding.  Ambiguity should be avoided since it poses a threat to the value and purpose of LOIs. 

Material Terms

The terms addressed by an LOI will vary by transaction, but there are certain matters that are nearly universally addressed, including: 

In the context of property acquisitions: 

• Property;
• Purchase price; 
• Earnest money deposit;
• Feasibility period; and 
• Closing date.

In the context of leasing: 

• Leased premises; 
• Permitted use;
• Term;
• Rent;
• Taxes, insurance and common area maintenance (“CAM”) obligations;
• Utilities; and
• Construction and tenant fit-out obligations or improvement allowances.

The above should be viewed as categories of the terms to include, as the transaction at hand will dictate how each matter should be particularly addressed.  By way of example:

• The purchase price may be agreed to on a per square foot basis with the final price determined by survey, or the final price may be a fixed price regardless of deviations on acreage; 
• Rent may be structured as triple-net (payment of CAM obligations), gross (no CAM obligations), or modified gross (payment of CAM above baseline/base year); and 
• The lease term may commence upon a fixed date or satisfaction of certain conditions (i.e., construction of the tenant improvements must be substantially complete).

There are additional terms an LOI can address depending on the transaction or parties’ needs.  For example:

• A buyer may intend to form a special purpose entity (“SPE”) at closing and require the right to assign the purchase and sale agreement to affiliates without the seller’s approval; 
• A multi-family developer purchasing raw land with no existing utilities may require the seller’s cooperation to obtain governmental approval for the purposes of obtaining the necessary entitlements to develop the land; and
• A retail tenant may require an “exclusive use” covenant from the landlord to prohibit any uses on the property that directly compete with its business. 

Generally Non-Binding

Although an LOI is almost always non-binding, deviating from its terms– or even the spirit of its terms – is not without consequences because an LOI serves as a roadmap of the parties’ intent. Diverging from the terms of an LOI can lead to claims of “re-trading,” which will only make the negotiation of definitive agreements costly and time-consuming.  As a result, principals should not delegate the negotiation of a LOI to authorized agents, such as their brokers, without active and continued involvement.  Collaboration between principals and their authorized agents is critical to ensure that the LOI accurately captures the key deal points both parties intend to uphold. 

Binding Terms

Once binding elements are introduced into a LOI, it is often imperative for legal counsel to review, since brokers may encounter complications related to the lack of consideration or the unauthorized practice of law under the Texas Real Estate License Act.  Common binding terms relate to exclusivity, confidentiality, and broker commissions. 

Practice Tips

• Create an internal process on how LOIs should be drafted, reviewed, and signed. 
• Include clear non-binding language. 
• Consult with legal counsel when in doubt.