Most sophisticated commercial real estate (“CRE”) transactions, including leases, acquisitions, dispositions, joint ventures, and loans, usually start with a letter of intent (“LOI”). Depending on the transaction and the parties involved, lawyers may or may not be involved in preparing the LOI. The LOI is designed to summarize key business terms and is generally non-binding in most respects. The LOI should quickly establish the core business terms before the parties spend time and resources preparing more a complicated, binding contract (the “Definitive Agreement”) and commencing due diligence. A good LOI should efficiently establish that the parties are in basic agreement regarding the contemplated transaction, so that the parties can promptly advance to the negotiation of the Definitive Agreement without becoming entrenched in protracted LOI negotiations. This article will explore potential problems when drafting the LOI and tips on how to effectively resolve them.
First, the LOI should focus on the most important deal points and not be unnecessarily complicated. Targeting key business issues, at the LOI stage, allows parties to remain focused on resolution of critical issues without getting distracted on the verbiage and complexities that should appear in the Definitive Agreement. Keeping the LOI simple and straightforward should save clients time and money, rather than having the parties rework deal points through countless versions of the Definitive Agreement. A simple test for whether an issue should be documented in the LOI is whether it serves as a critical lynchpin to the parties’ progressing toward the Definitive Agreement. Another simple test is whether the other party would be surprised to find the term in the Definitive Agreement for the first time. If so, it should be included in the LOI.
Next, a fully-binding LOI is generally not recommended because it may omit many of the essential terms that courts would require to enforce the LOI as a binding agreement. While the LOI should address key business issues, it should generally not cover the ancillary provisions more properly addressed in the Definitive Agreement. One particular reason for that is because a legally-binding LOI may inadvertently serve as a basis of litigation; particularly if the LOI does not address many obligations and risks that should be covered in the Definitive Agreement. Accordingly, every LOI should clearly state that it is non-binding, except for certain clearly-labeled provisions, such as confidentiality, non-circumvention, exclusivity, and early access.
If the LOI goes beyond basic business terms and addresses technical matters and/or risk allocations, such as representations, warranties, and indemnities, then attorneys should minimally be involved in drafting the LOI for the LOI process. But, again, such detailed LOIs should typically be avoided since drafting risk-allocation concepts in the LOI may not account for all the relevant risks that the Definitive Agreement would address.
Rather than expediting the deal, an over-complicated LOI can be counterproductive and delay the process of arriving at the Definitive Agreement. It is generally preferable to keep the LOI simple, when possible. If the LOI is not simple and straightforward, it is more important to involve lawyers who draft and interpret complicated documents frequently. The quicker the parties are conceptually aligned at the LOI stage, the sooner they can finalize the Definitive Agreement and move on to the heart of the transaction.
