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Letter of Intent

The real estate letter of intent outlines broad terms for negotiating a final agreement between a buyer or tenant and an owner of a property. The purpose of a letter of intent is to get both parties to come to a non-binding agreement over the terms of a sale or lease. Once the letter is signed, the parties will each go to their respective counsel and draft legally binding contracts, commonly in the form of a purchase agreement or lease agreement.

Before agreeing to a real estate sales contract or lease, the parties may prepare a letter of intent, term sheet or other form of preliminary agreement (together, called here an “LOI”). Generally, an LOI may be signed or at least initialed and reflects that the parties have agreed on certain important terms of a deal, though not on all of its provisions or details.

LOIs serve useful purposes. One is to avoid misunderstandings arising out of complex negotiations. For example, by setting out those terms on which agreement has been reached, an LOI may narrow the areas for future negotiation. Similarly, an LOI may stipulate that certain formalities must be met, such as a final signed writing, before either party is bound to perform the transaction. Another common purpose of an LOI is to secure the parties' exclusive efforts toward concluding the transaction.

As a federal appeals court has explained, “When a deal necessarily is preceded by costly groundwork, a letter of intent may benefit both the purchaser and the seller…. [T]he buyer secures the seller's undivided attention as long as progress continues in ironing out the points of the transaction. Neither party has committed himself to the exchange. Both have agreed to work toward it.”

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