Many commercial real estate deals do not begin with a signed purchase agreement. They begin with a letter of intent, a shorter document that outlines basic agreed terms. Many buyers, sellers, tenants, and landlords misunderstand its purpose. This confusion can cost them leverage, money, or even the entire deal.
How Letters of Intent and Binding Contracts Actually Differ
A letter of intent, or LOI, is a preliminary document that outlines key business terms. It covers items such as purchase price, closing timeline, due diligence, and exclusivity commitments. Most LOIs are intentionally non-binding. They do not legally require either party to complete the transaction.
The General Rule: Business Terms Are Non-Binding
The Exception: Certain Provisions Are Binding Even Within a Non-Binding LOI
This is where confusion most often arises. Many LOIs contain specific provisions that are binding regardless of whether the overall document is non-binding. These typically include:
- Exclusivity or No-Shop Clauses, which prevent the seller from negotiating with other potential buyers for a defined period
- Confidentiality Provisions, which restrict how each party can use or disclose information learned during negotiations
- Cost Allocation Terms, specifying who pays for due diligence expenses if the deal does not proceed
- Governing Law and Dispute Resolution Clauses, which apply to any disputes arising from the LOI itself, even if the underlying transaction never closes
A well-drafted LOI clearly separates which sections are binding and which are not, but poorly drafted LOIs frequently leave this ambiguous, creating exactly the kind of dispute that real estate contract lawyers are brought in to resolve after the fact.
The Transition to a Binding Purchase Agreement
When Courts Find an LOI Binding Despite Its Language
In rare cases, courts have found that an LOI was actually binding on the entire transaction, typically when the document’s language was inconsistent, when the parties’ subsequent conduct suggested they treated it as final, or when one party took significant action in reliance on the other’s commitments. This is precisely the kind of risk that careful drafting is meant to prevent.
Client Challenges Without Proper Legal Guidance
Parties negotiating a letter of intent without experienced counsel often encounter problems that only become clear once a dispute has already started.
Ambiguous Binding Language
LOIs that fail to clearly state which provisions are binding and which are not create exactly the kind of dispute where each side has a plausible, but conflicting, interpretation of their obligations.
Unintended Exclusivity Exposure
A seller who signs an LOI without understanding the scope of an exclusivity clause can find themselves unable to negotiate with a better offer for weeks or months, even if the original buyer is slow to move toward a binding agreement.
Premature Relaxation of Due Diligence
Buyers who treat a signed LOI as equivalent to a completed deal sometimes ease off on financing preparation or property investigation too early, leaving them scrambling once the actual purchase agreement deadline arrives.
Walking Away Without Understanding Cost Exposure
Parties who assume an LOI is entirely non-binding sometimes discover, after walking away from a deal, that they are still responsible for due diligence costs or confidentiality obligations spelled out in the document.
Reliance-Based Disputes
When one party makes significant investments or takes visible steps based on the other’s commitments in an LOI, such as beginning permitting work or lining up financing, a dispute can arise over whether that reliance created obligations beyond what the LOI’s language technically states.
Private Lending Term Sheet Confusion
Private lenders and borrowers negotiating a loan often use a similar document, a term sheet, that raises the same binding versus non-binding questions. Borrowers who assume a signed term sheet guarantees funding can face serious timing problems if the lender is not contractually committed until the final loan documents are signed.
Applications and Benefits of Proper LOI and Contract Structuring
For Buyers
Buyers benefit from an LOI that preserves their ability to walk away if due diligence reveals a problem, while still locking in the seller’s exclusivity commitment during the negotiation period.
For Sellers
<p>Sellers benefit from clearly defined exclusivity terms with a firm deadline, protecting them from being tied up indefinitely by a buyer who never intends to move forward to a binding agreement.
For Commercial Tenants and Landlords
Commercial leasing negotiations frequently begin with an LOI outlining base rent, lease term, and tenant improvement allowances before the full lease is drafted, making clarity about what is binding just as important in leasing as it is in a purchase transaction.
For Private Lenders and Borrowers
Term sheets in private lending transactions serve a similar function to an LOI, and clearly defining which terms are binding, such as exclusivity or fee obligations, protects both the lender and the borrower during the underwriting period. The American Bar Association’s guidance on commercial real estate transactions provides useful context on how courts have interpreted binding versus non-binding LOI language in commercial settings.
For Investors Negotiating Multiple Deals Simultaneously
Investors pursuing several potential acquisitions at once need LOIs that clearly define their ability to walk away without penalty, since being bound to exclusivity across multiple properties can quickly become an expensive constraint.
Across each of these applications, the value of experienced counsel lies in making sure the document says exactly what the parties intend, rather than leaving room for a later dispute over what was actually agreed.
Frequently Asked Questions About Letters of Intent
Is a letter of intent legally binding?
Generally, the core business terms of a letter of intent are not legally binding, but specific provisions such as exclusivity, confidentiality, and cost allocation clauses are typically enforceable even within an otherwise non-binding document.
Can I walk away from a deal after signing an LOI?
In most cases, yes, provided the LOI is properly drafted to state that the transaction itself is non-binding until a full purchase agreement is signed. However, you may still be bound by specific provisions like exclusivity or confidentiality.
What is the difference between an LOI and a term sheet?
An LOI and a term sheet serve similar functions, outlining preliminary terms before a binding agreement is drafted, but a term sheet is more commonly used in financing transactions, including private lending, while an LOI is more commonly used in property purchase or lease negotiations.
When should I involve real estate contract lawyers in the letter of intent process?
Before signing. The binding provisions in many LOIs are easy to overlook without legal review, and the time to identify and negotiate those terms is before the document is signed, not after a dispute has already started. The National Association of Realtors’ legal resources offer additional guidance on why early legal review of preliminary agreements matters in commercial transactions.
Choosing the Right Legal Partner
Because the line between binding and non-binding terms is often subtle, selecting counsel with specific experience in this area matters significantly. Look for:
- Experience drafting and negotiating both LOIs and full purchase agreements, since the transition between the two requires careful consistency
- A clear approach to identifying which provisions should be binding, rather than relying on boilerplate language that may not reflect the client’s actual intentions
- Familiarity with private lending term sheets, since similar binding versus non-binding questions arise in financing negotiations
- Experience with commercial leasing LOIs, which involve different key terms than a purchase transaction but raise the same enforceability questions
- A practical, deal-focused approach, since overly aggressive LOI terms can sometimes discourage the other side from moving forward at all
At Andelsman Law, our real estate contract lawyers bring decades of experience drafting and negotiating letters of intent, term sheets, and binding purchase agreements for buyers, sellers, investors, and private lenders throughout New York. We make sure our clients understand exactly what they are agreeing to at every stage of a transaction, not just at the final signature.
Know What You Are Signing Before the Letter of Intent Costs You
If you are preparing to negotiate a letter of intent, a term sheet, or a full purchase agreement, contact Andelsman Law today to make sure your next deal starts on solid legal footing.
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