- Erin Holliday
Pretty Fly for an LOI
Wouldn’t it be great if there were a way to just get all the clear-cut terms down in writing before spending all that time, money, and brain power on creating a complicated contract? Well, you’re in luck! A “letter of intent” aka an LOI is a clear, concise listing of agreed-upon terms between parties to a contract. LOIs are typically not-binding (depending on how they are drafted) but they do require a good-faith intent to start the process of the agreement they intend to lead to. They’re like a good-faith “agreement to agree.”
We often draft or review LOIs for commercial leases, leases for land, real estate purchase agreements, complex client-relationship agreements, and more, because they help everyone really understand the key and agreed-upon terms of the agreement right off the bat. They help find potential non-negotiables or sticking points to the transaction and can lead to a more complete, smooth negotiation process.
LOIs are like the ingredient listing at the top of the recipe. Sure, they aren’t the whole enchilada and they don’t always include all of the important terms – bake time, temperature, or when to fold the cheese – but they do tell you the key ingredients that you will need to move forward. From there, you can draft your more complex agreements with a strong frame of reference.
For example, here are a few key terms you might include in an LOI before drafting a commercial lease. The LOI is not the lease, and it might not be as binding as a lease, but it could answer the following questions (and point out potential sticking points in need of negotiation):
How much will the rent be, including how it will be paid, how it can be increased, and by how much;
How long will the lease last? And how can it be renewed by the tenant (such as an automatic renewal option at the end/expiration of the lease);
Who will be responsible for repairs? What about utility payments?
Who will be responsible for taxes, common area maintenance, and other additional operational costs outside of the rent?;
Is the landlord going to fix anything before the tenant moves in? Will the tenant be able to improve the space, and if so, how much can they do this? Just cosmetic changes or a full-scale remodel? Who will pay for these changes?;
Who will own what in relation to the property? Maybe the tenant will bring in some fancy refrigerators or machines, and wants to make sure they can keep these when the lease terminates. Or maybe the landlord agrees to make significant changes to counters and shelving and wants to make sure these remain at the end of the lease; and
Any other unique terms that are specific to the property. Every lease, space, and business is unique so an LOI can always include customized considerations the parties have agreed to before drafting the lease.
An LOI for a real estate purchase agreement will have different considerations than a commercial lease, such as the purchase price, how long the sales period will last, and any contingencies – such as an inspection or the buyer securing financing – that may cancel the sale if they fall through. (Also, check out our resource on buying/selling a business in the resource library or download it directly here)
You could create an LOI for any type of agreement you’re entering into. They serve as a way to start the conversation. LOIs may also include what aspects of an agreement will be negotiable and non-negotiable, outline deadlines for certain aspects of a transaction as well as any other terms for how the agreement process will work.
It’s also important that if you get an LOI for something like a lease and you want your lawyer to look over the lease, you should have them look at the LOI too or at the very least make sure if you already signed one to provide it to your lawyer. Even if the terms are non-binding, it can be hard to try to negotiate terms agreed to in the LOI in the actual contract; it could be seen as “bad faith” or going back on your word. Remember the purpose of the LOI is to help establish the major terms to see if it’s worth negotiating the rest of the agreement. Once you’ve signed your LOI, it will be very important that you and your lawyer make sure that any agreed-upon terms in the LOI you intend to maintain are accurately reflected in the actual binding contract you sign further down the line.
Leases, purchase agreements, and other complex agreements are challenging and time-consuming to draft and negotiate, but creating an LOI can help both buyers and sellers, landlords and tenants, and other parties on two sides of the transaction really come to an understanding about what important terms are going to be settled in these types of agreements.