Bob – Walt, your topic today is the Letter of Intent. In residential real estate a buyer presents the purchase agreement to the seller, what’s different about using a Letter of Intent?
Walt - Good morning Bob, I’m not saying that a buyer or tenant won’t present a sales contract or lease to the seller or landlord, but in commercial real estate, the vehicle of choice, is a Letter of Intent or LOI. It’s a letter from one party to the other outlining the major components of the agreement, which could be either a sale contract or lease agreement.
Bob - So what’s in it?
Walt -First, make sure the parties and address or premises is identified correctly, with contact information provided so that the responsible parties are correct on the document.Second, set out the key terms that are going to be presented in an outline format, for example, the address, rental rates, occupancy dates, landlord or tenant’s obligations, survey criteria and environmental issues.Next, establish a timeframe and if not met one party should confirm in writing to the other party that the LOI has expired.Another point, most LOI’s are nonbinding, but the agreement needs to state that clearly in writing.Lastly, the LOI should include language that it will be superseded by a signed definitive agreement, for example, an executed purchase contract or lease.Bob – Walt, you mentioned nonbinding; if it’s nonbinding why go through all the effort of negotiating the deal.
Walt - Yes, why an LOI? The LOI can save time and money. Complex commercial transactions have documents that are extensive and very long. By reaching agreement on the key terms, before generating massive documents it’s a wise and worthwhile step. Negotiating the LOI brings major issues to the surface and if they are insurmountable it’s better to discover them sooner than later.
Bob - The LOI helps to identify the major points of the lease or sales contract, so by going through this process it helps the buyer, seller, landlord and tenant agree on the major issues and components of the lease. So when you’re working with a commercial broker and he/she says they’re going to go through the LOI process, hopefully it’ll take a complex commercial transaction to a simple workable agreement that outlines all the important parts of the document.
Once the LOI’s agreed to, the agreed-upon items in the LOI are then transferred to the lease document or the purchase contract to help facilitate the transaction and move towards closing.
Bob – How can people reach you today to talk about commercial real estate?
Walt - Thanks Bob, Walt Arnold, Sperry Van Ness, direct line 256-1255, our website is waltarnold.com. To summarize again, the LOI if used appropriately will help reduce the risk of failure in the transaction increase the prospects of success and save time and money. Bob have a great Fourth of July, be safe and we’ll talk to next week.