Understanding Letters of Intent

Author: Ameriah S. Bonds, Esq.

What is a Letter of Intent?

A Letter of Intent (LOI) is a preliminary agreement often used in real estate transactions, whether between buyers and sellers or prospective landlords and tenants in commercial leases. Essentially, an LOI is usually a non-binding document that outlines the general terms and conditions agreed upon by the parties before a formal contract is drafted.

Getting an attorney to draft a formal, binding contract can be very expensive and time-consuming.  An LOI ensures the parties agree on all the major terms of the agreement before spending the time and money necessary to get a final binding agreement.

The LOI serves as a roadmap for the final contract, ensuring that all parties have a mutual understanding of the key terms before investing time and resources into drafting a binding agreement. It covers crucial aspects such as pricing, timelines, and other conditions agreed upon by the parties.

Elements of a Letter of Intent.

While each LOI is unique to the specific transaction, certain elements are commonly included and should always be present. In real estate sale transactions, an LOI typically includes the following key elements:

1. Names of the Buyer and Seller: Clearly identifying the parties involved
   
2. Description of the Property: Providing specific details about the property.
   
3. Sale Price: Stating the agreed-upon price.
   
4. Essential Terms: Outlining important conditions of the purchase.
   

Additional important matters that should be included in an LOI are:

1. Seller’s Warranties: Any guarantees provided by the seller.
   
2. Due Diligence Periods: The length and scope of time allowed for due diligence.
   
3. Title Insurance Designations: Information regarding title insurance
   
4. Closing Costs: How closing costs will be split between the parties
   
5. Binding or Non-binding Nature: A declaration of whether the LOI is intended to be binding or non-binding.
   

Are Letters of Intent Binding or Non-binding?

Generally, LOIs are non-binding, indicating that the parties involved are interested in making a deal but have not yet agreed to a final, legally enforceable contract. However, disputes can arise when parties mistakenly believe that an LOI constitutes a binding agreement.

The binding nature of an LOI depends on whether the parties have explicitly stated their intention for the LOI to be binding. If specified within the LOI, it becomes binding and enforceable against all parties involved. In the absence of such a specification, courts, such as those in Florida, may need to determine whether the parties intended to create a binding agreement and whether the LOI contained all essential terms necessary for a binding contract.

Conclusion

In summary, an LOI sets the stage for a successful business deal by clarifying terms and expectations from the outset. Typically used at the beginning of a prospective commercial purchase or lease, an LOI is not a final binding agreement unless explicitly stated otherwise. Without a clear indication of the parties' intent for the LOI to be binding, it remains an "agreement to agree" and is generally unenforceable under Florida law.

It is always advisable to consult with a knowledgeable real estate attorney before signing and entering into an LOI. An attorney can provide guidance on whether an LOI is the appropriate document for your specific real estate transaction.

The information you obtain on this website is not, nor is it intended to be, legal advice. You should consult with an attorney for individual advice regarding your own situation.