A letter of intent (LOI) may look preliminary, but unclear terms can affect your time, money and negotiating position. In a California commercial real estate deal, an LOI usually outlines the main terms before you negotiate a formal purchase agreement.
Before moving forward, review these five areas closely:
1. Binding and nonbinding provisions
An LOI can state which terms the parties intend to be legally enforceable and which remain subject to a final agreement. Pay particular attention to terms involving confidentiality, exclusivity or access to the property.
Clear wording can reduce uncertainty because California courts may consider both the document and the parties’ conduct.
2. Due diligence timelines
Check when your due diligence period, or the time you have to investigate the property and deal, begins and ends. The LOI may also identify which inspections, financial records, leases or other documents you can review during that time.
Clear deadlines can help you avoid losing important review opportunities.
3. Exclusivity provisions
An exclusivity or ‘no-shop’ term may prevent the seller from negotiating with other potential buyers for a stated period.
Review how long the restriction lasts and when it begins so you understand how much protection from competing buyers the provision provides.
4. Purchase price and deposit terms
Confirm the proposed purchase price, deposit amount and payment deadlines. The LOI may also explain when the deposit becomes refundable or nonrefundable.
These details can affect how much money you put at risk before closing.
5. Contingencies
Contingencies are conditions that must be met before the deal can move forward. Review conditions involving financing, environmental inspections, zoning or land-use approvals. If your investment plans involve development, government approvals may also affect whether and when the project can move forward.
These contingencies can give you time to determine whether the property still fits your investment plans.
Prepare for the next stage of the deal
An LOI can affect what happens when you begin negotiating the purchase agreement. Understanding its terms early can help you identify obligations or deal points that need more attention. Legal guidance can also help clarify whether certain provisions may be binding and whether the LOI reflects the deal you intend to make.
