Is a Letter of Intent Binding in a Real Estate Deal?

Usually no, and usually that is what both sides intend, but whether a letter of intent is binding depends on what the document says and how the parties behave after signing it. An LOI or term sheet sets out the price, deposit, due diligence period, closing date, and the other main terms so that both sides can commit time and money to a definitive contract. Draft it carelessly and a court may read it as the contract itself. Draft it well and only the provisions you choose, such as confidentiality and exclusivity, will bind anyone.

Why most LOIs are not binding

A contract to sell land must be in writing and signed by the party to be charged, and an LOI signed by both parties that states every essential term can satisfy that requirement. What keeps the typical LOI from becoming a contract is the parties’ expressed intent. A clear statement that the letter is non-binding, that neither party is obligated unless and until a definitive purchase agreement is signed, and that either party may end negotiations at any time for any reason is the core protection. Phrases like “subject to a mutually acceptable purchase agreement” and “subject to approval by the buyer’s investment committee” reinforce it. Courts give weight to the words the parties chose, so the words should be unambiguous. Our real estate contracts team treats the non-binding clause as the first paragraph of every LOI, not a footnote.

The provisions that should bind

Some terms only work if they are enforceable, and the LOI should say expressly that these survive and bind regardless of whether a definitive agreement follows:

• confidentiality, covering the existence of the negotiations, the terms, and any diligence materials exchanged;
• exclusivity or a no-shop clause, under which the seller agrees not to market the property or negotiate with others for a stated period;
• allocation of expenses, such as who pays for the survey, the environmental report, or the title commitment if the deal dies;
• access to the property for inspections, with insurance and indemnity for damage;
• governing law, and a statement of when the letter expires if not countersigned.

An express agreement to negotiate in good faith is a middle case. Some courts enforce it as a binding obligation to try, without obligating either party to reach a deal, and the remedy for breach is uncertain. Include it only if you understand that it may give the other side a claim if you walk away for reasons they consider improper.

The deal points to pin down

The LOI’s value lies in settling the points that are hard to reopen later, so it should be specific where it counts. For a purchase, that means price and deposit, whether the deposit goes hard after the study period, the length of the study period and the buyer’s termination right, the closing date and any extension, whether there is a financing contingency, which party delivers title and survey and on what deadline, the condition of the property (as-is or with representations), and whether the buyer may assign the contract to an affiliate. For a commercial lease LOI, the equivalents are rent and escalations, term, renewal options, improvement allowance, delivery date, and permitted use; our list of commercial lease terms worth negotiating shows which of those a landlord will not revisit once the LOI is signed. Brokers and their commissions belong in the LOI as well, since a dispute over who procured the deal is a common post-closing fight.

How an LOI accidentally becomes a contract

The risk usually comes from conduct and sloppy follow-up rather than from the LOI itself. A letter with all essential terms, no non-binding clause, and signatures from both sides looks like a contract. An email chain in which one party writes “agreed” to the other’s final terms can be a signed writing. Most dangerous is performance: a buyer who pays a deposit, begins inspections, and orders a survey, while the seller takes the property off the market and starts moving tenants, has given a court reasons to find that both sides treated the deal as done. If the parties want the definitive agreement to be the only contract, they should act that way, and the definitive agreement should state that it supersedes the LOI entirely.

From the LOI to the purchase agreement

Once the LOI is signed, the buyer’s counsel typically drafts the purchase agreement, using the LOI as the term sheet and filling in what the LOI left open: the representations and warranties, the remedies on default, the mechanics of the contract contingencies, the closing deliverables, and the title objection process. The LOI’s study period should be long enough to cover the due diligence the property requires, because an LOI that promises a short period makes it hard to negotiate a longer one in the contract. Our acquisitions and leasing practice coordinates that timing so the deal points in the letter survive into the agreement intact.

If you have an LOI in front of you and are unsure which parts of it bind you, a consultation with Capitol Law Partners can mark it up before you sign. Schedule a consultation.

This article is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by this communication.

Attorney Cagatay Ersoy. Practical strategy for founders, investors, and growing companies.

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