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The importance of letters of intent in real estate

On Behalf of | Aug 24, 2021 | Real Estate Law

Real estate transactions can often seem straightforward. But there are pitfalls which can appear if care is not taken to avoid them. Making intelligent decisions early in the process of any transaction can help you avoid misunderstandings and even litigation.

Letter of intent

Early in the negotiations of a business deal, the parties may choose to memorialize the terms they initially discuss. Letters of intent fill this role, acting as something near a ‘pre-contract’. The LOI may include things like the names of the parties and any key issues or definitions. Timelines, nondisclosure agreements and termination provisions may also be discussed.

An LOI can help ensure that the parties are on the same page and avoid conflicts which may arise if the terms are not reduced to writing. LOI’s are flexible documents, meaning they can be tailored to suit the needs of the parties and the transaction they are contemplating.

Binding or non-binding?

Frequently, the parties to a transaction do not intend the terms of an LOI to be legally binding. When this is the case, the LOI should clearly state that it does not bind the parties until a final agreement has been fully negotiated and completed. In the absence of such clear language, Pennsylvania may consider the LOI binding, despite the original intent.

If a disagreement arises and a court has to decide whether an LOI is binding or not, it will look to the text of the document, what negotiations have taken place, whether there has already been partial performance and anything else it deems relevant.

Whether an LOI is binding or non-binding is not always clear and can require an intense factual examination, costing time and money. You can save yourself quite a bit of both by having the LOI reviewed first by a qualified professional.