Key Takeaways

1. A Letter of Intent (LOI) outlines preliminary terms in a real estate deal and helps guide formal contract negotiations.
2. LOIs can include both binding and non-binding clauses, making legal clarity essential.
3. Common risks include vague language, unclear binding status, and lack of legal review.
4. A real estate attorney should be involved early in the LOI drafting process to minimize disputes and ensure enforceability.
5. LOIs are commonly used in commercial transactions, but they also apply in complex residential negotiations.
6. Adding timelines, contingencies, and confidentiality terms improves the document’s clarity and legal strength.
7. Including a sample LOI template and understanding its key components can help avoid costly mistakes.

In the context of leasing, or buying and selling real estate property, letters of intent (often referred to as an “LOI”) are typically used by the parties to provide the proposed terms of the transaction.

Purpose of Letter of Intent in Real Estate

While letters of intent may be used in both commercial and residential real estate, letters of intent are typically used in commercial real estate leases and purchases and not in residential transactions. (Residential transactions on the other hand, typically use a pre-printed offer or counteroffer form completed by the real estate agent or broker.)

Things you should know when preparing or receiving a letter of intent.

What Terms to Include in Letters of Intent?

A simple letter of intent may be one to two pages long, while a complex one setting forth detailed contemplated terms may be 15 to 20 pages long. A simple LOI may set forth the amount of earnest money deposit, amount of loan, amount that will be paid in cash at the close of escrow, when escrow will open, amount of security deposit, and lease effective date. A lengthier and more detailed letter of intent may include a lot of the terms that will ultimately show up in the final lease or purchase and sales agreement, including terms of due diligence, inspection rights and obligations, financing, representations and warranties, title insurance, waivers, allocation of closing costs, remedies for default and liquidated damages, and commissions, among other topics.

Do I Need an Attorney to Prepare or Review the Letter of Intent?

Typically, letters of intent are prepared by real estate agents or brokers who are assisting with the lease or purchase transaction. However, it is a good idea to hire a real estate attorney in Los Angeles to review it before it is finalized and signed. Hiring an attorney to help you spot issues may help you ensure that the entire deal will not have to be reworked at a later date. It may also help you ensure that you do not inadvertently create contract terms when you do not intend for the LOI to be nonbinding.

Are Letters of Intent Binding?

A letter of intent may be binding or nonbinding, depending on the parties’ intent and the language of the LOI. It may also be nonbinding overall but have certain provisions that are binding, such as a confidentiality provision or provide the prospective purchaser or tenant certain reimbursement costs if the deal falls through. A nonbinding letter of intent is used for general discussion purposes only and is not an offer, acceptance, or contract.

A nonbinding letter of intent should include a disclaimer to make it clear that nothing contained in the LOI is binding on the parties. On the other hand, a binding letter of intent has terms that contain mandatory language in it (e.g., “The parties will…”) and may contain words such as “agree” and “agreement.” The distinction may not be very clear for an inexperienced party.

A party that is inexperienced in drafting the LOI may unintentionally draft a binding LOI where a nonbinding one was intended. Even where the LOI includes disclaimer language that it is nonbinding, it is still important to look at the other terms to determine whether the LOI is binding overall or there are portions that constitute an agreement between the parties.

What Are the Risks of Using a Letter of Intent?

Although Letters of Intent (LOIs) are preliminary in nature, errors in their drafting can lead to significant legal and transactional consequences. Below are some of the most common mistakes to avoid when preparing or reviewing an LOI:

1. Failing to Specify Binding vs. Non-Binding Clauses

One of the most critical mistakes is not clearly identifying which provisions of the LOI are legally binding. Terms related to confidentiality, exclusivity, or dispute resolution often require legal enforceability, whereas other business terms may remain non-binding.

Tip: Include a clause explicitly stating which sections are intended to be binding to avoid ambiguity and unintended obligations.

2. Using Ambiguous or Vague Language

Unclear terminology can lead to conflicting interpretations between the parties. Phrases like “reasonable time” or “to be agreed upon” can open the door to disputes.

Use precise language and define key terms within the document to establish clarity.

3. Overlooking Important Contingencies

Many LOIs omit critical contingencies such as due diligence rights, financing conditions, or zoning approvals. Missing these elements may create pressure to close deals prematurely or on unfavorable terms.

Ensure that the LOI outlines all essential preconditions before any binding commitment.

4. Skipping Legal Review

Even though an LOI may appear informal, its implications can be serious. Failing to consult with a real estate attorney can result in unintended legal exposure.

Always seek legal review before signing, especially if the LOI contains binding terms or involves high-value transactions.

5. Missing Deadlines or Expiration Dates

Some LOIs are open-ended, leading to confusion over when negotiations should conclude or when the document is no longer valid.

Add an expiration clause or define key timelines to maintain deal momentum and accountability.