What Is a Letter of Intent?

A letter of intent, often used in commercial transactions, is simply a letter in which a buyer expresses to the seller interest in buying property and sets out the basic terms of the transaction. Since the preparation of an offer to purchase commercial property can often be time-consuming, the purpose of a letter of intent is to see if the parties are in general agreement on the basic terms of the transaction. If they are, the parties can then proceed to have a purchase and sale agreement prepared based upon the terms of the letter of intent. 

A few suggestions are worth considering in drafting letters of intent. First, the parties to an LOI should include as many of the significant business points as possible in an effort to limit disputes and negotiations later. This should include a legal description of the property, the price of the property, the length of any due diligence period, the amount of earnest money, when the earnest money goes “hard” or becomes nonrefundable, the closing date, any major conditions to closing (such as a rezoning contingency), and who will pay certain costs (such as obtaining a survey, title insurance, and transfer taxes). 

One risk of a letter of intent is that it will be so specific and detailed that it is misconstrued as an offer to purchase property that, if accepted, will create an enforceable purchase and sale agreement. The more the parties agree to in a letter of intent, the greater the risk that one of the parties may claim that the letter of intent was actually an offer, and that by signing it the other party entered into an enforceable contract. The best way to mitigate this risk is to state in the LOI that it is not intended to be a contract and that only a subsequently signed contract will bind the parties. In response to this and similar contracting issues, the Georgia Court of Appeals has stated that “the failure to agree to even one essential term means that there is no agreement to be enforced.”31 In other words, as long as the parties fail to include at least one essential term in a letter of intent, it is unlikely that a court would find the LOI to be an offer capable of becoming a binding contract. However, the same court stated that “a deferral of agreement on a nonessential term does not invalidate an otherwise valid contract.”32 It can be difficult to determine what terms are “essential” since this designation is highly dependent upon the facts and circumstances of the specific sale in question. For example, in the particular case cited above, the letter of intent was clear on the identification of the property involved, the purchase price, earnest money, and certain conditions of closing. However, the letter of intent clearly contemplated a deed restriction regarding use of the property, the exact terms to which the parties had not yet agreed. The court, in this case, held that the deed restriction was an essential term, that the parties had never reached a meeting of the minds on that issue, and that the letter of intent could therefore not be enforced as a binding contract. In a different case, however, the Georgia Supreme Court upheld a letter of intent as an enforceable contract.33 In that case, Beller & Gould (a partnership) executed a letter of intent to acquire the Lisenbys’ property. The letter of intent gave Beller & Gould the option to purchase the property by November 15, but when Beller & Gould tried to exercise the option and enter into a formal agreement, the Lisenbys refused. Beller & Gould then sued for specific performance to enforce the agreement of the parties. The court found that the letter of intent was sufficient to support the creation of a binding agreement because the letter (1) identified the parties and their assent to the terms of the agreement, (2) described the subject matter of the contract, and (3) set forth the terms of the consideration.34 The court went further and stated that even if the parties discussed other terms that were not included in the letter of intent, the absence of such terms did not render the letter of intent unenforceable.35 The court determined that all of the material terms of the agreement had been established in the letter of intent.36 To help avoid the risk of having a letter of intent being considered an enforceable contract, most letters of intent contain specific language stating that they are only intended as a letter of intent and not as a real estate purchase and sale agreement. An example of such a provision is included below: Letter of Intent Notwithstanding any provision to the contrary contained herein, all parties acknowledge that this Letter of Intent is not intended to be and shall not be construed to be an offer to purchase real property that, if accepted, shall create an enforceable purchase and sale agreement between the parties. This Letter of Intent is intended as nothing more than an expression of interest in the real property discussed herein and no binding agreement of sale shall be formed until and unless the parties agree to a separate written purchase and sale agreement subsequent to the Letter of Intent being accepted. Parties should not underestimate the value of a well-written letter of intent. While letters of intent are generally not legally binding,37 they establish the basis of what will eventually be included in the purchase and sale agreement between the parties. If there has been an agreement on a particular point in the letter of intent, few parties will agree to alter that term in the purchase and sale agreement. Therefore, deal points that are particularly important to a party should be included in a letter of intent to avoid disputes on those points at a later time. §2.1.2Time Limit of Offer
 
Weissman, Seth. The Red Book on Real Estate Contracts in Georgia (pp. 90-93). BookBaby. Kindle Edition.
 

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