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Commercial real estate transactions: The letter of intent

On Behalf of | Aug 22, 2022 | Real Estate Transactions |

Every purchase and sale of commercial property must be handled carefully. From the initial due diligence to the finalization of an agreement, oversights and miscommunications can create an unwanted opportunity for litigation. Letters of intent can be useful but, if they’re not handled properly, can also lead to discord.

How are they used?

A letter of intent (LOI) is often the first document exchanged between a potential buyer and seller. It is an opportunity for them to get on the same page and clearly state what their respective goals are for the transaction. When done properly, an LOI can create a level of comfort for both parties, saving time, energy and resources, so that they’re confident they’re moving in a positive direction.

The LOI will identify the parties involved and the property in question. It can include the buyer’s intentions and any offered terms. And since every commercial real estate transaction is unique, the LOI will contain any item relevant to the sale in question – what may be important in one purchase/sale will not be relevant in another.

Is the LOI binding?

As a general matter, Arizona does not consider LOI’s to be binding upon the parties. In fact, Arizona’s Statute of Frauds requires all purchase/sale agreements to be signed by the party against whom enforcement is sought – otherwise, it’s invalid. So, by not signing an LOI, it lessens the chances that the included terms will be binding.

Most LOI’s will include a provision specifically stating they are not bound by its terms. However, if the parties intended to be bound by an LOI, courts are more inclined to enforce them.

The language used in an LOI is critical. A well-drafted LOI, written with the aid of an attorney who is experienced in Arizona commercial real estate, will smooth the transaction and further the parties’ goals. A stock LOI, or one written with little thought, may embroil the parties in litigation.