Page 8 - Minnesota Vol 8 No 3

MITCHEL CHARGO AND MARVIN LISZT | Real Estate Law
Letters of Intent: Proceed With Caution
Many commercial real estate transactions begin with a preliminary letter of intent.
e primary function of the letter of intent is to outline the essential or basic terms upon which a buyer and seller or lessor and lessee would be willing to consummate the transac- tion. Yet, by its title, the letter of intent is normally not intended to be the - nal agreement. Rather, I have long viewed the letter of intent as simply a “road map” to or “blueprint” for the binding lease or purchase agreement; once the primary terms are identi ed, the parties will proceed to document the transaction. Nonetheless, care- lessness in the dra ing of the letter of intent or in the understanding of the actual intent behind it may ultimately lead to the letter becoming a bind- ing agreement. As a result, it is best to tread very carefully when dra ing, reviewing, and analyzing a proposed letter of intent in connection with a commercial real estate transaction.
ere are some advantages to using a letter of intent in commercial real estate transactions. Dra ing a letter of intent forces the parties to focus on the essential terms of the transac-
tion (e.g., price/base rent/CAM, clos- ing/occupancy date, tenant improve- ments, etc.) without having to identify speci c legal terms right away. A er all, there is a bene t to con rming the parties’ expectations and ensuring that everyone is headed in the same direction. is may also help identify key areas of disagreement at the out- set of the transaction and either pav- ing the way to resolve those issues or realize the obstacles are too great to resolve. Signing a letter of intent, even if it is non-binding, gives the transac- tion a feeling of momentum - a feeling that the deal is really happening. is, in turn, creates a sense of momentum pushing the parties on through to the dra ing of the nal agreement. Use of a letter of intent may also be helpful in the way of facilitating or obtaining third party nancing, investment or government-issued permits.
Yet, despite its advantages, there are some signi cant di culties presented by use of a letter of intent. Letters of intent, by their nature, do not contain all the terms of the transaction. De n- ing the remaining obligations of the parties can o en lead to con ict and
the failure to reach a nal and bind- ing agreement. On the other hand, retaining counsel to dra a highly detailed letter of intent can be costly and frustrate the purpose of creating
a simple blueprint for the nal deal. Sometimes, parties will use letters of intent to “shop” the deal in order to de- termine whether other parties would be willing to beat the terms contained in the letter of intent. Because of the non-binding nature of letter of intent (see below), unscrupulous parties may shop the deal despite the letter of intent containing “no shop” or “no ne- gotiation” provisions. is, of course, can lead to con ict and even litiga- tion when an unwitting party learns to its disappointment that the other side has reached agreement with an outside party. e most glaring dis- advantage, though, is that if a letter of intent is not carefully dra ed, it could end up binding the parties to the real estate transaction. e disadvantage does not end there, though. Even with careful dra ing, parties can create confusion by intending some terms of the letter of intent to be binding while simultaneously dra ing other terms in the same letter of intent be non-binding. Some examples of the terms that can be binding despite the non-binding nature of the letter of in- tent include con dentiality provisions restricting disclosure of terms of the deal, or terms restricting the lessor or seller from marketing or shopping the transaction while the parties negoti- ate the nal transaction.
Mitchel Chargo and Marvin Liszt are shareholders at Bernick Lifson, PA, a full-service business law rm in Minneapolis. Mitch and Marvin have over 65 years of combined experience in commercial real estate law. They represent clients in all aspects of com- mercial real estate transactions, with signi cant expertise in the areas of nancing, acquisition, development, leasing, sale transactions, and property tax appeals. Their clients include lenders, borrowers, owners, purchasers, developers, property managers, lessors, and lessees of commercial properties.
MITCHEL CHARGO
MARVIN LISZT
ATTORNEY AT LAW MAGAZINE · MINNESOTA· VOL. 8 NO. 3 8