What to know before signing a letter of intent
Arizona readers Sandy and Jim, 80, sent this email with an offer they almost accepted:
“We own 100 acres of land ideal for a solar farm and just received a letter of intent (LOI) from a San Francisco company wanting to lease it. We were about to sign and return the document when we came across your article `Leases of vacant land for solar farms pose great risks to owners.' What do you think of this LOI? Thanks.”
After reading, I handed it to my paralegal, Anne, and said, “Please give me your opinion of this LOI.” She went through the document, and, handing it back to me said, “It is laughable. Thank goodness they found your article.”
Hanford real estate attorney Ron Jones — who helped me with that earlier article — agreed with Anne. He explained the elements of a letter of intent.
What is a letter of intent?
“It outlines the basic terms of a proposed contract, lease or option, sent to the property owner in hopes that an eventual agreement will be accepted. Consider it knock on your door, with an, `I am interested in your property on these terms.' The `property' can be anything from industrial machinery, a million-dollar yacht, a business, employment, to land.”
“In most cases, a letter of intent is not an enforceable contract, but some of its specific contents might be! So, if you receive one, and are tempted to sign, it would be a mistake not to have it reviewed by a lawyer who can clarify points you might not fully understand,” Jones says.
So, consider an LOI as a cut to the chase designed to benefit the offeror by saving the time and expense of drafting a tailormade agreement for someone who might be uninterested in selling or leasing the property.
Watch out for these clauses in an LOI
Jones cautions, “An LOI can lead to some real problems, especially if it contains language that was in the one sent to your readers.” For example:
1. Confidentiality
“This agreement will be treated in confidence and no disclosure will be made without tenant or landlords prior written consent, except as required by law.”
2. Exclusivity agreement “Owner agrees that until the earlier of (a) signing of a lease, or (b) 300 days after the execution of this LOI have passed, the property shall be withdrawn from the market and owners will have no discussions or negotiations with any third parties concerning its possible sale, lease or the offer itself.”
Jones points out, “This means that the couple may be forbidden to discuss the terms of the LOI with their own real estate advisor and, the property will be in limbo for almost a year! If a better offer come in, the owners can't discuss them! This is overreaching.”
3. It's now or never.
A cover letter to the LOI gave two weeks to respond or the offer would lapse, resulting in the hoped for response: “They are offering us a great deal of money per acre and we certainly don't want to let this thing die on the vine,” Jim wrote.
Jones' take? “The solar farm developer is putting pressure the couple and it may be considered elder financial abuse since they know their age. It is pure nonsense because the land isn't going anywhere. They should contact the company and say, `We understand you would like this signed quickly, but we need time to run it by our family lawyer.' It is virtually certain they will agree and just ask to be kept informed.”
He adds, “If the response is, `We need it by that date or all bets are off,' then, they've just done the couple a real favor because these guys can't be trusted.”
4. Unreasonably long due diligence time frames:
Due diligence is designed to lessen risks to the party financing the project and to discover the potential impacts on the site. This may require input from civil engineers as well as archaeological, environmental, water, land and title experts. Typically, this takes anywhere from eight to 18 months.
Jones underscores, “Before committing to a long-term relationship with a developer, the owners need to conduct their own due diligence to be certain they are dealing with a legitimate company that has a good reputation. Therefore, research their online presence, including reviews, serious complaints, and get references from others who have leased to them.”
The LOI had a total of five years' worth of extended due diligence days. To Jones, “attempting to tie up the property that long is excessive. While the developer offered to pay some cash per extension, they could have finished their due diligence and said, `Sorry, we can't do it,' and just walked away.”
Consequently, we suggested to my readers they could either attempt to renegotiate the offer or walk away. And they walked!
Bottom line: It's always a good idea to consult with a lawyer if you receive an unexpected LOI.