Negotiate With a Letter of Intent

Posted on Wednesday, August 08, 2018

Have you ever been interested in buying commercial property or a business but hesitated because of all the costs and legalities involved in submitting a formal contract of sale? By using a Letter of Intent, you can nail down the most important terms of a contract without any obligation to settle and without the costs associated with drafting a contract.

Commercial business brokers often use a Letter of Intent to bring two negotiating parties together without having to enter into a formal contract.

Sometimes referred to as a Letter of Understanding or a Memorandum of Agreement, a Letter of Intent is usually written as a non-binding agreement, where the potential Buyer and Seller recite and agree to the major terms under which they are willing to settle. They also agree to follow up the agreement with a formal contract of sale within a specified period of time after both parties execute the document.

A Letter of Intent is often preceded by the signing of a Non-disclosure Agreement, or Confidentiality Agreement, where a prospective buyer  agrees not to disclose any information provided by the seller during the negotiation or due diligence process. If negotiations break down after the Letter of Intent is signed, the prospective buyer is still bound by the terms of the Confidentiality Agreement.

Here are some of the items you might want to include in a Letter of Intent:

1. A full description of the property being purchased.
2. The purchase price.
3. The amount of refundable good faith deposit.
4. The date on which a binding contract of sale will be concluded. 
5. Reference to any confidentiality agreements previously signed.
6. Statements to the effect that the agreement is non-binding and not a legal agreement.
7. Signatures and date lines acknowledging the agreement of both the buyer and seller.

Important: Limit the items included in the Letter of Intent to the most critical issues. You should notinclude any terms, which might be interpreted legally as surviving the non-binding nature of the agreement.

For example, you should not include a however or but clause, which might read "... however, if negotiations should break down over the price agreed to herein, both parties shall exercise good faith to reaching an agreement which is agreeable to both parties."

In most commercial transactions, the business broker will furnish the buyer with a custom Letter of Intent. Because the agreement is standard, it may or may not be suitable for your particular transaction. Therefore, always consult with your attorney to see if the document covers your situation and protects you legally.

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Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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