The complexity of documents for business transactions continues to grow exponentially. In 1985, a standard lease for a 5,000 RSF space was often less than 20 pages. In 2013, it’s not uncommon for a lease for a 2,000 RSF space to exceed 100 pages. What is a client to do?
The answer: a clearly drafted Non-Binding Letter of Intent (LOI). An LOI can be substantive as to “non-binding basic business terms” and form a clear basis of the parties’ business understanding. It is both more fruitful and more economical for the parties to hash through a 4-5 page letter of intent and agree upon most major business terms than to become mired in lengthy legal documentation before a deal is cut.
Why should the LOI be Non-Binding? For the very simple reason that the LOI is a summary of business terms, not all salient deal terms – the definitive, binding contract will address due diligence in detail, representations and warranties, remedies upon a default, return of deposits, and other essential terms. The parties must take care to ensure that the LOI is non-binding or it may be construed as an enforceable, if wholly deficient, contract with dire consequences for both parties. Be explicit and state: “This LOI is merely a non-binding expression of the basic business terms to be incorporated into a formal and binding contract. This LOI is not an offer, contract, option or commitment and it creates no enforceable legal rights between the parties.”
Not to worry that the LOI expressly states that it is Non-Binding. With few exceptions, sophisticated business men and women honor the terms of their Non-Binding LOIs through the documentation and execution stages of the transaction.
What should the LOI cover? For a Real Property Purchase Contract, we suggest the following:
- Purchase Price.
- Financing Contingency.
- Amount and timing of Deposits toward the Purchase Price.
- Review of title to the Property, survey requirements and procedures for approval of title matters.
- The Due Diligence Period and duration of the same, physical inspections, Buyer’s indemnity with respect to Buyer’s entry onto the Property and Buyer’s liability insurance.
- Sold “AS-IS and WITH ALL FAULTS”.
- Closing Date and rights to extend.
- Willingness to participate in a 1031 Tax Deferred Exchange.
- Closing Costs, Prorations and Payment of Brokerage Commissions.
For your sake, consider using a Non-Binding Letter of Intent to streamline your next business transaction.
If you have any questions, please contact Kendall Patton at: (650) 342-9600 or firstname.lastname@example.org.