A letter of intent can be both binding and non-binding. A binding letter of intent is a precursor and contains many of the elements found in a purchase agreement.
A non-binding letter of agreement is more similar to a memo discussing some or all the aspects of the terms under discussion. Any LOI may be potentially considered as a precursor to a purchase agreement.
LOI’s more or less stipulates that both parties have agreed to the terms of the sale but also that they have not reached an agreement that they will actually work with each other to complete the sale, purchase or lease of a commercial property.
The agreement is more tenuous and allows either the seller to accept an alternative Letter of Intent, and also gives the buyer the opportunity to pass on the sale.
The benefits of a non-binding letter of intent is that it is cheaper to put together than a purchase agreement. It let’s both parties keep a step back from making an actual commitment until one or both parties are satisfied before they commit to a purchase agreement.
It also allows the parties to focus on the terms and keeps the sale moving forward. And, it is also a productive method to identify any potential problems which need to negotiated.
There are some drawbacks with a non-binding letter of intent as the language used could be considered legally binding if the non-binding LOI is not drafted carefully.
Improper language could lead the court to rule that the LOI contains terms that could construe it as a binding contract even though you have stated at the outset that it is non-binding which makes the legal status of a non-binding LOI unclear.
Because of these legal technicalities it is vital that your real estate attorney draft the non-binding letter of intent, because otherwise you could opening up a litigious nightmare if you do so yourself.
Every LOI, whether it be binding or non-binding, must be reviewed carefully. Certain aspects of a non-binding letter of intent can also be drawn up so some components are binding and if so specified which gives you some latitude in how use them.
It is important to remember to use a non-binding letter of intent carefully, and to have it drawn up by an experienced lawyer.
