What Belongs in an LOI, and What to Leave Out

A letter of intent, or LOI, is the pre contract document where buyer and seller outline the essential deal terms before drafting a formal purchase agreement. LOIs save time and money by getting the big terms aligned before lawyers produce full contracts. But LOIs can also create problems when they include too much detail, too little detail, or language that binds parties before they intended to be bound. For Macomb County commercial buyers, understanding what belongs in an LOI shapes better negotiations.

What belongs in the LOI. Purchase price and any earn out or adjustments. Earnest money amount and terms. Due diligence period length. Financing contingency terms if applicable. Closing date target. Any material property specific conditions like existing lease assumption or environmental provisions. Broker representation and commission arrangements. Confidentiality expectations during negotiations. Deadline for LOI acceptance or expiration.

What belongs on the price line. The gross purchase price, clearly stated. Any known adjustments like proration of rents, taxes, and expenses at closing. Any adjustment mechanisms like price adjustments based on due diligence findings. Any special payment structures like seller financing terms if applicable. The line should be specific enough that misunderstandings do not survive into contract drafting.

What belongs in due diligence terms. Total duration of the contingency period. Specific inspection rights the buyer wants. Access rights for buyer inspectors and consultants. Document delivery obligations from seller including rent roll, operating statements, leases, contracts, and other materials. Extension options if needed. Termination rights if buyer discovers unacceptable conditions.

What belongs in financing terms. Whether the buyer needs a financing contingency. If so, the amount and terms of expected financing. Time period to obtain financing commitment. Buyer’s cooperation with lender diligence including appraisal access. Termination rights if financing cannot be obtained on acceptable terms. Michigan lender timelines typically support 45 to 60 day financing contingencies on standard commercial acquisitions.

What belongs on closing timeline. Target closing date. Contingencies that could delay closing. Extension options if unforeseen issues arise. Party responsibilities for closing preparation. Michigan as an attorney close state means closings happen at attorney offices with both sides’ attorneys managing the process, which affects logistics.

What to leave out of LOIs. Detailed representations and warranties. Detailed indemnification language. Detailed closing document formats. Detailed post closing adjustments. Any language that could be interpreted as creating binding obligations before contract signing. Full legal contract terms belong in the purchase agreement, not the LOI.

The binding versus non binding distinction. Most LOIs include language explicitly stating that the LOI is non binding except for specific provisions like confidentiality, exclusivity, and broker commission acknowledgments. This structure lets parties negotiate openly without creating enforceable obligations from preliminary discussions. Language accidentally creating binding obligations can trap parties into deals they had not fully committed to.

The exclusivity question. Sellers often want exclusivity provisions preventing them from negotiating with other buyers during a specified period. Buyers investing significant due diligence money benefit from exclusivity protection. Reasonable exclusivity periods run 30 to 60 days on typical commercial deals. Excessive exclusivity harms sellers if the primary buyer walks away.

The confidentiality provision. Both parties benefit from confidentiality provisions covering LOI terms and due diligence information. The seller does not want lease and tenant details public. The buyer does not want acquisition strategy public. Reasonable confidentiality provisions should extend beyond the specific transaction to protect information used in evaluating it.

The broker acknowledgment. LOIs typically acknowledge which brokers represent which parties and the commission expectations. This clarification prevents commission disputes later. Both parties should understand who represents whom and how commissions will be paid at closing.

The negotiation dynamics. LOIs get negotiated back and forth before acceptance, often through email exchanges with red line changes. Each round of changes signals the other party’s priorities. Sellers pushing back on price signals price sensitivity. Buyers pushing back on due diligence period signals concerns about property specific risks. Reading the changes teaches the counterparty’s priorities.

The path from LOI to contract. Once LOI is accepted, attorneys typically produce a purchase agreement within 1 to 3 weeks reflecting the LOI terms plus standard legal provisions. The purchase agreement gets negotiated on those additional terms while the LOI provides the framework. Well drafted LOIs reduce contract negotiation significantly because the big terms are already aligned.

TDG Commercial, known as top commercial real estate agent in Macomb County, structures LOIs that efficiently move Michigan commercial transactions toward closing.