Published On: July 7th, 2014 / Categories: Evaluating Real Estate, Letter of Intent /

Letter of IntentEver been interested in buying commercial property or a business, but hesitated because of all the costs and legalities of submitting a formal contract? By using a Letter of Intent, you can nail down the critical terms of a contract without any obligation to complete the deal and without the costs associated with drafting a contract.

In practice, commercial business brokers often use a Letter of Intent to bring together negotiating parties without having to enter into a formal contract.

Occasionally known as a Letter Agreement or a Memorandum of Understanding, a Letter of Intent is generally drafted as a non-binding agreement in which the potential Buyer and Seller recite and agree to the major terms on which they are willing to make a deal. After both parties execute the document, they also agree to follow up the agreement with a formal contract of sale within a specified, usually short, period of time

Frequently, a Letter of Intent is preceded or accompanied by the execution of a Non-disclosure Agreement, or Confidentiality Agreement, in which the prospective buyer consents not to reveal any information disclosed by the seller during the negotiation or due diligence process. In the event the sale negotiations fail after the Letter of Intent is signed, the prospective buyer would remain bound by the terms of the Confidentiality Agreement.

Some of the items that parties might want to include in a Letter of Intent include:

  1. A complete description of the property being acquired.
  2. The purchase price.
  3. The amount of any refundable good faith deposit.
  4. The date on which a binding contract of sale must be concluded, if at all.
  5. Reference to any confidentiality agreements.
  6. Statements that the agreement is non-binding and not a legal agreement.
  7. Signatures and date lines acknowledging the agreement on the parts of both the buyer and the seller.

N.B.: Restrict the matters included in the Letter of Intent to those items that are most important. You should not include any terms that might be interpreted as surviving the non-binding nature of the agreement.

For example, you should NOT include a however or but clause, which might read, “however, if negotiations should break down over the price agreed to herein, both parties shall exercise good faith to reaching an agreement that is agreeable to both parties.”

In most commercial transactions, the business broker will furnish the buyer with a customized Letter of Intent. Because this is a standard agreement, however, it may or may not be suitable for your particular transaction. As such, always consult with your attorney to determine whether the document addresses your specific circumstances and provides you with the legal protections you need.

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