Be careful if you’re asked to sign a ‘letter of intent’

If you’re involved in the sale or lease of commercial real estate, very often you’ll be asked to sign a “letter of intent.” A letter of intent isn’t a formal lease or purchase agreement; rather, it’s a signed statement that the parties plan to negotiate a deal later that involves certain elements.

Because a letter of intent doesn’t seem like a contract – it seems more like a simple handshake acknowledgement that the parties hope to hammer out a formal agreement later – some people sign them without giving them a great deal of care.

This can be a mistake. Letters of intent are contracts in themselves, and can have serious consequences.

A letter of intent is typically used by a buyer or renter to show that he or she is serious about the deal, and to tie up the property and keep it from “getting away” for a period of time while the two sides negotiate in good faith.

A standard letter of intent might state the basics of the agreement – such as the price or rent, and the closing date or lease term – but will leave for later more detailed and technical parts of the deal, such as representations, warranties, insurance requirements, apportionment of closing costs, etc.

That’s fine – but the letter has to be worded very carefully to make sure that it really is non-binding and that the parties can still get out of a deal if they can’t work out the details afterward.

If the letter isn’t drafted well, then you could intend nothing more than a good-faith negotiation, but end up being on the hook to go through with a deal that doesn’t meet your needs.

Another tricky aspect of letters of intent is that they typically are meant to be binding in several respects. For instance, they typically say that during a certain period of time, the property owner is not allowed to market the property to anyone else, sell or lease the property to anyone else, or disclose the details of the negotiations to anyone else.

If you sign such an agreement, you should be aware that it will be binding even if another buyer or renter comes along with a better offer.

For instance, in a recent case in Oregon, the owner of a shopping mall signed a letter of intent saying that it wouldn’t market or sell the property to anyone else for 60 days. However, the owner sold the mall to someone else during that time. As a result of not being able to complete the deal, the jilted would-be purchaser suffered more than $900,000 in tax losses.

The purchaser sued the mall seller, and the Oregon Court of Appeals said the seller had to pay the amount of the purchaser’s tax losses as damages.

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