Letters of Intent: Using Attorneys Efficiently in Structuring the Real Estate Transaction
Time value of money versus risk…. These basic concepts drive our business and investment decisions and an attorney’s representation of your interest should factor these concepts as well. An attorney can help you structure your transaction to reduce the period of time between when you’ve committed your capital investment and when you start receiving returns. An attorney can also help you reduce the risk of your investment to achieve greater returns at a reduced risk threshold; whether it’s day to day risk associated with an operating company or a real estate investment. Attorney involvement early in your transaction can help you achieve those goals.
Real estate transactions involve business deal points (such as whether to lease or purchase, price, location, size, length of term) that the owner determines with the assistance of a real estate broker, if necessary, and legal points (such as apportionment of liability and risk, representations and warranties, and indemnifications) that the business owner determines with the assistance of an attorney. A letter of intent (or “LOI") is a good tool for the principals to use to structure the real estate deal’s basic general terms before committing significant resources (and expense) to the transaction.
Attorneys and letters of intent. A non-binding LOI, signed by both parties, guides the preparation of a formal lease or purchase agreement and saves money by ironing out main deal points before turning the transaction over to the attorneys. If the parties have key “deal breaker" terms they must have in order to proceed with the transaction, they should negotiate them at the LOI stage to avoid spending money on due diligence and legal fees negotiating the agreement, only to have the deal fall through due to the inability to agree on a key deal point. The more information provided in an LOI, the fewer deal points attorneys will have to argue over in the following agreement, thus saving time and money. While LOI’s are typically handled by the principals to reduce legal costs before the parties are ready to commit, early consultation with an attorney can help the principals structure key legal terms ahead of time so the attorneys later won’t have to expend time (and the client’s money) negotiating them. As a rule, attorneys usually follow the terms of the LOI very closely since it is an expression of their clients’ intentions. However, too much information will make the LOI cumbersome and may intimidate a less sophisticated party that is not accustomed to complex agreements.
Non-binding letters of intent. Great care must be taken to ensure that the LOI is non-binding, otherwise, if the deal falls through, one party may try to assert that the LOI constituted a binding contract. Often times a buyer/lessee is reluctant to sign an LOI (fear of creating a binding transaction) and the seller/lessor does not want to “offend" the other principal by asking them to sign an LOI. “I wish I had a dollar" for every time I’ve had a client resist using an LOI, only to have trouble later for failing to use one. What better way for a buyer/lessee to ensure the negotiations are non-binding than to get it in writing in an LOI. From the seller/lessor’s perspective, when the other side does sign an LOI there is a greater sense of commitment to the transaction, even though non-binding. To ensure the LOI is non-binding, it should have express non-binding language and the parties should avoid making statements or taking actions implying that they have a "done deal" after signing an LOI. In some instances, a non-binding LOI will specify some terms that are meant to be binding, such as confidentiality provisions protecting the seller/lessor and an agreement to take the property off the market to protect the buyer/lessee during negotiation of the formal agreement. It can also be used to allow certain limited due diligence activities to occur pending the completion of a formal agreement. You should have your attorney review the LOI before signing it to ensure the language, either binding or non-binding, meets your intentions.
Why you should take the lead in drafting the letter of intent and agreement. Letters of intent are usually fairly simple and most transactional attorneys have a form of LOI they use for a given transaction to reduce the client’s cost of having the attorney prepare the LOI. Most important, the form of LOI for a given transaction should also dovetail into the form of agreement that the attorney would use; also reducing costs. The client’s decision on which side’s attorney will draft the agreement has a direct impact on attorney costs. It is much easier for an attorney to use their own form of agreement that they are familiar with than to review and revise another attorney’s form of agreement. However, if one side conducts several similar transactions (such as a shopping center owner with multiple tenant leases), that party may logically insist on using their own form of agreement. More sophisticated clients will prepare the LOI, or use a form initially prepared by an attorney, and handle revisions on their own but under the guidance of their attorney. However, you should always have your attorney review the LOI before presenting it in final form and subsequent execution.
What ‘s typically included in a letter of intent. Letters of intent for real estate purchases typically set forth the parties' names, a description of the property, price and method and timing of payment, deposit amount, method of taking title, escrow and title company, due diligence period, contingencies to proceeding with the purchase, confidentiality, and payment of closing costs, expenses and pro-rations. Letters of intent for real estate leases can be more extensive and can include the tenant's trade name, notice address, square footage floor area, premises location, term, options to extend the lease, the lease commencement date, minimum annual rent, percentage rent, security deposit, guarantor, tenant's use and exclusive use, maintenance of the premises, tenant improvements, signage, payment of taxes, insurance and utilities, common area maintenance and expenses, and assignment and subletting.
Early coordination between attorney and client when preparing an LOI will help reduce the client’s risk, structure an efficient transaction, and reduce overall legal costs of negotiating the transaction.