A letter of intent for the purchase/sale of a commercial real estate parcel (“LOI”) is a very important part of the contract negotiation process and must be handled properly. The primary objective and reason for utilizing a LOI is to memorialize the essential business terms of the real estate sale that have been discussed and that are mutually acceptable to the parties prior to drafting the contract. The LOI also typically provides the parties with a timeline for negotiating and drafting a formal binding agreement that commemorates the essential business terms found in the LOI as well as any outstanding terms not agreed upon prior to sending the LOI.

The LOI allows the parties to confirm in a relatively expeditious manner (in writing) that the essential business terms of the agreement like the diligence period deadlines, closing date, sales price, general contingencies and overall parameters are mutually acceptable before the parties invest the time and money required to negotiate and draft the commercial real estate sales contract in its entirety.  The negotiation and drafting process for the contract often takes weeks (sometimes months) to complete with multiple drafts and revisions passing between the parties and their attorneys throughout the process. Said time and expertise usually results in the parties incurring substantial legal fees, which is why it is beneficial that the parties have the essential business terms agreed upon beforehand.

It is important to note, however, that LOIs typically state expressly on the face of the LOI that the terms found in the LOI are non-binding and are understood by both parties as such. However,  LOIs could be deemed enforceable depending on the intent of the parties and the circumstances of the transaction compared with the evidence in the document itself . When there is an issue as to the enforceability and validity of the terms of a LOI,  Illinois courts typically attempt to discern the intent of the parties from the language used in the LOI itself. In Brunette v. Vulcan Materials Co., the court said that “where the reduction of an agreement to writing and its formal execution is viewed by the parties as a condition precedent to the vesting of rights and duties, there can be no contract until then, even if the actual terms have been agreed upon.” In Leekha v. Wentcher, the court stated that “where the intent of the parties is that neither will be legally bound until the execution and delivery of a formal agreement, then no contract comes into existence until such execution and delivery.”

Due to Illinois case law, it is essential for the parties of a commercial real estate sales transaction to state their intentions in relation to the binding nature of the COI with as much specificity and as clearly as possible. If the intent is for the LOI to be non-binding then there can be no ambiguity or wiggle room for the LOI to be construed by an Illinois court as a binding contract.  In Chicago Investment Corp. v. Dolins, the court recognized that the parties may specifically provide that negotiations are not binding until a formal agreement is executed.  The Court specifically stated, “if the parties construe the execution of a formal agreement as a condition precedent, then no contract arises unless and until that formal agreement is executed.”

LOIs should be drafted very carefully to state the essential business terms of a commercial real sales contract as specifically and in as much detail as possible. The LOI should also state very clearly and conspicuously that the LOI is intended by the parties to be non-binding and does not create an enforceable agreement in any way. Preparing a well-crafted and concise LOI will save the parties time and attorneys fees in the negotiation and drafting phase of the real estate sales transaction.

If you have any questions regarding letters of intent in relation to commercial real estate transactions please contact us at Jostock & Jostock, P.C. to discuss in more detail.