A letter of intent (LOI) is often the first written step in an Arizona commercial real estate transaction. Many buyers and sellers see it as a simple outline of the proposed deal. That is not always the case. While an LOI usually serves as a framework for future negotiations rather than a final agreement, certain provisions may become legally enforceable if the parties clearly intend that result. Knowing that distinction before signing can help prevent unexpected disputes later. That is why it is worth taking a closer look at what an LOI can accomplish.
Why some LOI terms may be enforceable
Arizona courts generally consider the language of the document and the parties’ intent. An LOI may explain that most business terms will not take effect until a final purchase agreement is signed. At the same time, it may state that certain provisions apply as soon as the LOI is signed, such as:
- Confidentiality provisions
- Exclusive negotiating or “no-shop” clauses
- Responsibility for negotiation costs
- Governing law or dispute resolution provisions
Every LOI is different, so even small differences in wording can matter. That makes it important to read every provision carefully.
Why assuming can create problems
A common mistake is assuming that every section of an LOI has the same legal effect. One provision may simply guide negotiations while another may create enforceable obligations before closing. If a disagreement arises, the language of the LOI and the parties’ conduct during negotiations may become important.
Arizona’s Statute of Frauds generally requires agreements for the sale of real property or an interest in real property to be in writing and signed by the party to be charged. Even if the parties have not signed a final purchase agreement, specific provisions in an LOI, such as confidentiality or exclusivity, may still be enforceable if the parties intended those provisions to take effect immediately. Knowing that distinction can help avoid unnecessary disputes.
Read every provision carefully
Most letters of intent are not meant to serve as the final purchase agreement. Even so, some provisions may become effective before the transaction closes. Reviewing which terms create legal obligations and which simply guide future negotiations can help commercial buyers and sellers move through the transaction with greater confidence.