MEbiz Real Estate Insider – LOI ROI: The Value of a Letter of Intent

By Courtney Tucker, real estate attorney

Courtney Tucker

Efficiency and value are fundamental guiding principles in our business lives and most of us look for ways to maximize those qualities. In real estate transactions, whether you are a buyer, seller, landlord, or tenant, a letter of intent can be a key tool to avoid spending unnecessary time, energy and money on a transaction which is unlikely to reach a closing.

A well-conceived term sheet can help the parties (and/or their brokers) hash out the substantive deal terms and help control the legal fees needed to draw up a full purchase and sale agreement or lease. It gives the parties an opportunity to determine if their negotiating partner is willing and able to deliver some basic level of acceptable deal terms. These letters offer both parties that valuable reality check moment well before they have invested substantial resources into a negotiation.

A letter of intent provides the ability to gauge the seriousness and capability of the other party. Term sheets which propose overly vague terms or unrealistic demands are easy red flags to spot a business partner that may have impractical views of the opportunity being presented. This helps a party avoid long, drawn-out negotiations that may be likely to reach an unsatisfactory conclusion, or worse, create ill will between the parties.

A letter of intent also offers a chance to better identify deal requirements. They cause each side to focus on the fundamentals of a transaction and recognize those areas where there is little room to negotiate, and those areas where there may be an advantage in flexibility. Additionally, they help your advisors, financial and legal alike, to better identify and solve potential issues before either side has invested too much effort and money in a fruitless transaction.

Be warned that even an informal term sheet can easily have all the elements of a binding contract, so be sure that the language of your document makes it clear that the provisions are statements of intent only and are non-binding (if that is your purpose). Also consider whether you would like certain provisions to be binding, such as confidentiality or “no-shop” provisions. Before you sign, it is a good idea to have your lawyer review the document, with input from your tax advisor when possible.

Of course, a letter of intent cannot, and should not, replace the exercise of fully papering a deal.  By undergoing the process of negotiating a term sheet, each side should have some comfort that the deal is a realistic one which promises a sufficient up-side. That comfort, together with the time efficiency and cost savings, should lend itself to a more successful closing.