How to Draft a Letter of Intent for Commercial Estate for Sale Transactions

How to Draft a Letter of Intent for Commercial Estate for Sale Transactions

When your organization is ready to purchase or sell commercial real estate, a Letter of Intent serves as the critical first step in formalizing the transaction. This document outlines the basic terms and conditions before both parties invest significant time and resources into drafting a comprehensive purchase agreement. Understanding how to structure this document properly can save your business from costly misunderstandings and position you for a smoother closing process.

Understanding the Purpose of a Letter of Intent

A Letter of Intent in a commercial estate for sale transaction is a preliminary agreement that captures the essential deal points between buyer and seller. Unlike a binding contract, most Letters of Intent contain both binding and non-binding provisions. The non-binding sections typically cover price, property description, and general terms, while binding provisions address confidentiality, exclusivity periods, and responsibility for due diligence costs.

This document serves multiple strategic purposes. It demonstrates the buyer's serious interest in the property, establishes a framework for negotiations, and creates a timeline for completing due diligence and finalizing the purchase agreement. For sellers, it provides assurance that the buyer has the financial capacity and genuine intent to complete the transaction.

Essential Components to Include

Your Letter of Intent for a commercial estate for sale should address several fundamental elements. Start with a clear identification of both parties, including full legal names and addresses. Describe the property with specificity, including the street address, legal description, approximate square footage, and any included fixtures or equipment.

The purchase price and payment structure require careful attention. Specify the proposed purchase price, earnest money deposit amount, and how the deposit will be held. If the transaction involves seller financing or assumption of existing loans, outline these arrangements in sufficient detail to avoid ambiguity.

Include provisions covering the due diligence period. This section should specify the length of time the buyer has to inspect the property, review financial records, conduct environmental assessments, and verify zoning compliance. Clearly state which party bears responsibility for the costs of these investigations.

Structuring Binding and Non-Binding Provisions

One of the most critical aspects of drafting a Letter of Intent is distinguishing between binding and non-binding terms. Most commercial real estate Letters of Intent explicitly state that the substantive business terms, such as price and closing conditions, are non-binding and subject to execution of a definitive purchase agreement.

However, certain provisions should be binding to protect both parties during negotiations. These typically include:

Confidentiality obligations that prevent either party from disclosing sensitive information about the transaction or the property. This protects the seller from having proprietary financial information shared with competitors and protects the buyer from having their acquisition strategy disclosed prematurely.

Exclusivity or "no-shop" clauses that prevent the seller from soliciting or entertaining other offers for a specified period. This gives the buyer confidence that their time and money invested in due diligence will not be wasted because the seller accepted a competing offer.

Cost allocation provisions that specify which party pays for title searches, surveys, environmental reports, and other due diligence expenses. These binding commitments prevent disputes about who owes what if the transaction does not close.

Addressing Due Diligence and Contingencies

The due diligence section of your Letter of Intent should establish a realistic timeline for the buyer to complete all necessary investigations. For commercial estate for sale transactions, this period typically ranges from 30 to 90 days, depending on the property's complexity and the scope of required inspections.

Specify the types of inspections and reviews the buyer intends to conduct. These might include physical property inspections, environmental Phase I and Phase II assessments, review of rent rolls and tenant leases, examination of operating expenses, verification of zoning and permitted uses, and confirmation of compliance with building codes and ADA requirements.

Include contingencies that must be satisfied before the transaction can proceed. Common contingencies in commercial real estate transactions include obtaining financing, receiving satisfactory results from environmental assessments, verifying tenant occupancy and lease terms, and securing necessary governmental approvals or permits.

Defining the Timeline and Closing Conditions

Establish clear deadlines for each phase of the transaction. Your Letter of Intent should specify when the due diligence period ends, when the buyer must secure financing commitments, when the purchase agreement must be executed, and the target closing date.

Address the conditions that must be met at closing. These typically include delivery of clear and marketable title, execution of tenant estoppel certificates, transfer of all permits and licenses, delivery of updated surveys, and prorated adjustments for property taxes, utilities, and rent.

If the commercial estate for sale includes tenants, specify how rent security deposits will be transferred and how existing leases will be assigned. Address whether the seller will provide any representations or warranties about the condition of the property or the accuracy of financial information.

Handling Earnest Money and Deposits

The earnest money deposit demonstrates the buyer's commitment to the transaction. Your Letter of Intent should specify the deposit amount, typically ranging from one to five percent of the purchase price for commercial properties. Identify who will hold the deposit, whether a title company, escrow agent, or attorney, and under what conditions the deposit becomes non-refundable.

Clearly state the circumstances under which the buyer can recover the earnest money. Generally, if the buyer terminates during the due diligence period or if a contingency is not satisfied, the deposit should be returned. If the buyer defaults after contingencies are satisfied, the seller may be entitled to retain the deposit as liquidated damages.

Incorporating Flexibility for Negotiations

While your Letter of Intent should be specific enough to provide a meaningful framework, build in appropriate flexibility for continued negotiations. Use language such as "subject to" or "to be negotiated in the purchase agreement" for complex issues that require more detailed treatment than a Letter of Intent can accommodate.

For example, representations and warranties about environmental conditions, allocation of closing costs, and indemnification provisions are often noted in the Letter of Intent but fully developed in the purchase agreement. This approach allows parties to reach agreement on major business terms without getting bogged down in legal details during the initial stages.

Protecting Your Interests with Proper Language

The language you use throughout the Letter of Intent matters significantly. Be explicit about which provisions are binding and which are not. A common approach is to include a statement such as: "Except for the provisions regarding confidentiality, exclusivity, and costs, which are binding upon execution, this Letter of Intent is non-binding and does not create any obligation to complete the transaction."

Avoid language that could inadvertently create binding obligations. Terms like "agrees to purchase" or "commits to sell" may be interpreted as creating an enforceable contract, even if that was not your intention. Instead, use phrases like "intends to purchase" or "proposes to acquire" to maintain the preliminary nature of the document.

Coordinating with Related Documents

In complex commercial real estate transactions, your Letter of Intent may reference or coordinate with other agreements. If the transaction involves assumption of existing financing, you may need to work with documents similar to a Landlord Subordination Agreement to address lender priorities. If the property is held in trust, you might eventually need a Land Trust Deed to facilitate the transfer.

Consider whether the transaction might require cancellation of any existing agreements. Having a clear understanding of documents like a Cancellation of Property Sale Agreement can help you anticipate potential complications if the seller has previous commitments to other parties.

Common Pitfalls to Avoid

Several common mistakes can undermine the effectiveness of your Letter of Intent. Avoid being too vague about critical terms. While the document is preliminary, it should provide enough specificity that both parties understand the fundamental deal structure. Stating merely that the parties will negotiate a "fair price" or complete due diligence in a "reasonable time" invites disputes.

Do not overlook the importance of clearly designating which provisions are binding. If you intend the confidentiality and exclusivity provisions to be enforceable, state this explicitly. Ambiguity about bindingness can lead to litigation about whether a contract was actually formed.

Resist the temptation to negotiate every detail in the Letter of Intent. This document should address major business points but leave room for the more comprehensive purchase agreement to handle detailed legal provisions. Trying to resolve every potential issue at the Letter of Intent stage often delays progress and increases the risk that the deal will collapse before it gains momentum.

Moving from Letter of Intent to Purchase Agreement

Once both parties execute the Letter of Intent, the focus shifts to completing due diligence and negotiating the definitive purchase agreement. Use the Letter of Intent as your roadmap, ensuring that the purchase agreement reflects the terms outlined in the preliminary document.

During this transition period, maintain clear communication between all parties. If due diligence reveals issues that require adjustment to the purchase price or terms, address these promptly and document any modifications in writing. Keep track of deadlines specified in the Letter of Intent and request extensions in writing if additional time is needed.

The purchase agreement will expand upon the framework established in the Letter of Intent, adding detailed representations and warranties, closing conditions, indemnification provisions, and dispute resolution mechanisms. However, the core business terms should remain consistent with what both parties agreed to in the Letter of Intent.

Practical Steps for Implementation

When you are ready to draft your Letter of Intent for a commercial estate for sale transaction, start by gathering all relevant information about the property and the proposed transaction structure. Understand your organization's priorities and identify which terms are essential versus those where you have flexibility.

Consult with your legal and financial advisors before submitting or signing a Letter of Intent. While this document is typically non-binding on substantive terms, the binding provisions can create significant obligations, and the overall framework will shape the entire transaction.

Be prepared to negotiate. The initial Letter of Intent is often a starting point for discussion rather than a final statement of terms. Approach the negotiation collaboratively, focusing on creating a framework that allows both parties to achieve their objectives while managing risk appropriately.

Document all agreed-upon changes in writing. If negotiations result in modifications to the original Letter of Intent, execute an amendment or revised Letter of Intent that clearly supersedes the earlier version. This prevents confusion about which terms actually govern the relationship between the parties.

A well-drafted Letter of Intent sets the foundation for a successful commercial real estate transaction. By clearly articulating the key business terms, distinguishing between binding and non-binding provisions, and establishing a realistic timeline for due diligence and closing, you position your organization to move efficiently from preliminary discussions to a completed acquisition or sale.

What terms should you include in a commercial real estate letter of intent?

Your letter of intent for commercial estate for sale transactions should clearly identify the parties, property description, and proposed purchase price. Include the deposit amount, financing contingencies, and due diligence period for inspections and title review. Specify the anticipated closing date and outline any conditions precedent, such as zoning approvals or environmental assessments. Address who bears responsibility for closing costs and property taxes. Clarify whether the letter is binding or non-binding, noting that confidentiality and exclusivity provisions are typically enforceable even in non-binding agreements. If applicable, reference existing leases or tenant obligations. Consider reviewing a Letter Of Intent To Sell Home For Mortgage Company for structural guidance. Finally, establish a timeline for executing the definitive purchase agreement to maintain deal momentum and avoid protracted negotiations.

How do you make a letter of intent binding for commercial property purchases?

To make a letter of intent binding for commercial property purchases, you must explicitly state which provisions are legally enforceable. Most letters of intent are non-binding, serving as preliminary agreements while parties negotiate final terms. However, you can designate specific sections as binding, such as confidentiality obligations, exclusivity periods, deposit terms, and dispute resolution procedures. Use clear language like "this provision is legally binding" to eliminate ambiguity. Include essential deal terms such as purchase price, closing date, and due diligence timelines. Both parties should sign and date the document to demonstrate mutual consent. Consider requiring an earnest money deposit to reinforce commitment. While a letter of intent can streamline negotiations, consult legal counsel before finalizing binding commitments to ensure your interests are protected and the agreement is enforceable under state law.

What happens if you breach a letter of intent before closing on commercial real estate?

Breaching a letter of intent for commercial estate for sale can lead to serious consequences, depending on how the document was drafted. While many LOIs are non-binding regarding the ultimate purchase, certain provisions like exclusivity, confidentiality, or due diligence obligations are often enforceable. If you breach these binding clauses, the non-breaching party may pursue damages, including out-of-pocket costs or lost opportunity claims. In some cases, courts may enforce specific performance if the LOI was sufficiently detailed. To minimize risk, clearly distinguish binding from non-binding terms and consider including a Cancellation Of Property Sale Agreement provision. Always consult legal counsel before walking away from an LOI to understand your exposure and potential remedies available to the other party.

Genie AI: The Global Contracting Standard

At Genie AI, we help founders and business leaders create, review, and manage tailored legal documents - without needing a legal team. Whether you're drafting documents, negotiating contracts, reviewing terms, or scaling operations whilst maintaining a lean team, Genie's AI-powered platform puts trusted legal workflows at your fingertips. Try Genie today and move faster, with legal clarity and confidence.