Letter of Intent: Binding or Non-Binding?
The first step in solidifying terms of a commercial real estate transaction is the Letter of Intent.
The Letter of Intent (“LOI”) contains the essential terms of the transaction and is often executed before the parties negotiate terms and provisions within the contract. The LOI must be carefully drafted or else it may be binding on the parties or obligate them to negotiate the contract under a duty of good faith and fair dealing.
If the parties do not wish to be bound by the terms of the letter of intent, then the document must clearly state that the letter of intent is merely an expression of the terms of a possible transaction and does not constitute an offer or an acceptance of an agreement.
The letter should also state that the parties have the right to terminate the letter at any time and that neither party shall have any obligation or liability to the other.
Key Considerations for Purchasers
PURCHASE PRICE | First and foremost, a prospective buyer of commercial real estate will consider the Purchase Price. This can be heavily negotiated based on a wide variety of factors pertaining to the property, existing business, and potential restrictions for use and development. Additionally, the purchase price affects multiple other provisions of the Purchase and Sale Agreement, particularly financing and appraisal of potential goodwill associated with the acquisition.
MARKETABILITY OF TITLE | Another key issue for the buyer in the Purchase and Sale Agreement is the marketability of title, and whether it is conveyed free and clear of exceptions that would impact the buyer’s intended use. In addition to municipal restrictions regarding zoning and development, private restrictions in the form of covenants binding on adjacent property owners, may prevent a prospective buyer from occupying the building or developing the land in accordance with its intended use.
PROPERTY CONDITION | The property’s physical condition is another key consideration. Most Purchase and Sale Agreements will state that the seller makes no express or implied representations and that the buyer will accept the property in its existing condition “as is, where is” and “with all faults.” Because of this boilerplate provision, a buyer should take the time to negotiate any repairs or changes that must to be made to the property for the property to be in a suitable condition for the buyer’s intended use of the property.
Key Considerations for Sellers
AUTHORITY | Sellers in a commercial transaction should determine which individual has authority to sell the property on behalf of the entity. Before entering into the Purchase and Sale Agreement, the seller must be certain that the entity is property organized under state law, that the seller has the authority to enter into the transaction, that the transaction does not require any third-party approvals, and that the transaction does not violate any other agreements to which the seller is a party. If all of these are not true prior to executing the contract, then if the seller signs the agreement they will be in breach of the contract and the buyer may pursue contractual remedies.
ASSIGNMENT | Sellers need to determine whether the contract should be assignable. Sometimes, the party that signs the contract as buyer does not plan to acquire the property but rather plans to assign its rights to a third party. The contract should state whether it is assignable. Sellers should be wary of buyers assigning their contractual rights because the assignee may be unable to perform under the contract, and the assignor (original buyer) will have little remaining interest or obligation to perform or cure the assignees breach of contract. If a buyer wants the right to assign their contract rights, a seller should consider whether the buyer possesses some critical market information that the seller does not.
MARKETABILITY OF TITLE | Sellers should also be aware of any existing liens that may attach to the property. A buyer will require the seller to deliver marketable title free and clear of any liens and encumbrances. Thus, a seller should ensure that all liens have been extinguished, unless the buyer and seller agree on a list of “Permitted Exceptions” or “Permitted Encumbrances.” For example, covenants, easements, and servitudes that impair the buyer’s rights are sufficient to render title unmarketable, but the buyer may still be willing to purchase the property subject to these matters at a reduced price.
Representations & Warranties
If the buyer is purchasing the property subject to existing contracts or service agreements and such contracts require third party consent before the contracts can be assigned to the buyer, it is the responsibility of the seller to initiate and complete the process of obtaining the necessary consent. The seller is the party that initially established these business agreements, thus it is their responsibility to initiate contact with the other parties to these contracts.
Once the requisite consent has been obtained, then it becomes the buyer’s responsibility to make sure that the consent is acceptable and determine whether contracts should be assumed or terminated.