Crafting Letters of Intent in Purchase Contracts

A letter of intent or “LOI” is a valuable tool to be used when negotiating a deal for the purchase or sale of commercial property. It can clarify the key terms, making it easier to draft the contract. Here are some common items to address when preparing an LOI. Remember that each deal is different, so the LOI must be tailored to your specific deal.

Parties. Identify the parties. If the buyer intends to take title in the name of an entity to be formed, the LOI should permit the contract to be assigned to an entity in which the “buyer” has an interest, as long as the named “buyer” remains responsible until closing.

Identification of the Property. Identify the property, including the street address, municipality, and tax identification number (i.e., block and lot numbers).

Purchase Price. Insert the purchase price, written out in words and numbers.

Deposit. Specify the amount of the deposit, when it is due, who will serve as escrow agent, and under what circumstances the deposit will be released. If the deposit is to earn interest, specify who will receive the interest and under what circumstances.

Closing. Indicate where and when the closing will take place. Will it be on a specific calendar day or after the satisfaction of certain contingencies? Are there any conditions precedent to either party’s obligation to close?

Closing Documents. State which documents and other items are to be delivered at closing by the parties.

Adjustments. Indicate how taxes, utility charges, rents, and similar charges are to be adjusted at closing. How will delinquent rents be adjusted?

Estoppels. Is the seller required to obtain estoppel certificates and SNDAs from all or a certain percentage of tenants? Will the contract contain an agreed upon form? Where major tenants’ leases contain a negotiated form, will that form be used?

Due Diligence. Specify the duration of the due diligence period and the scope of the buyer’s investigations, including any invasive testing. Is the seller required to be present for invasive testing? Is the buyer obligated to obtain insurance before testing?

Termination. What are the parties’ termination rights? How and when may those rights be exercised?

Quality of Title. Specify the quality of title to be delivered at closing.
Representations. What representations will be included in the contract? Will they survive the closing? For how long?

Condition of the Property. Is the seller obligated to the maintain the property in a certain condition before closing? What happens if the property is damaged or destroyed? Will closing be delayed? Can either party terminate? Under what circumstances?

Default. What remedies are available if a party breaches the contract? Will there be liquidated damages? Consequential damages? Will specific performance be available?

§1031 Exchange. Will the property will be bought or sold as part of a like-kind exchange? Will the other party be obligated to cooperate? What if the closing date is delayed and extends beyond the end of the 180 day exchange period?

Non-Binding. The LOI should be non-binding. If specific provisions are binding, these should be spelled out.