Your Non-Binding LOI Might Be Binding After All

Letters of intent (LOIs) in the commercial real estate space — those initial handshakes that used to fit on a napkin — have grown much longer and more complex in recent years. What was once a simple outline of potential high-level deal terms has evolved into something much more detailed, and in some cases LOIs look suspiciously like the purchase and sale agreements they are supposed to precede. Before signing an LOI, buyers and sellers need to understand the legal implications of this document.

How LOIs Have Evolved

An LOI exists to ensure parties agree on core deal terms early, helping them avoid investing significant resources in drafting a full contract without a clear mutual understanding. Traditionally, LOIs provided parties a chance to confirm the major deal points without creating binding legal obligations.

Typically prepared by brokers using preliminary information from each party, LOIs outline the fundamental business points: what’s being bought or sold, for how much, and under what basic conditions. Lawyers then refine provisions, adding necessary disclaimers and legal context. These documents appear across the deal landscape, in acquisitions and dispositions, lending and financing arrangements, and leasing transactions.

But LOIs have grown in length and complexity in recent years. Many are packed with material terms that would have been unthinkable a decade ago: detailed purchase price structures, comprehensive due diligence timelines, specific closing dates, financial commitment schedules, confidentiality and exclusivity clauses, representations and warranties, conditions to close, and even dispute-resolution mechanisms.

Why the Relationship Has Changed

The lengthening of LOIs reflects a fundamental shift in deal dynamics. In volatile markets, parties crave certainty before committing substantial resources. When interest rates fluctuate, financing markets tighten, and valuations shift weekly, sophisticated investors want to lock in fundamental understandings before expending significant time and capital on due diligence.

This is the paradox of modern dealmaking: Everyone wants to neutralize risk in the transaction before investing heavily, but the only way to truly neutralize risk is to negotiate something approaching a full contract. Buyers want assurance that sellers won’t walk away if property values increase during diligence. Sellers want confidence that buyers can actually close and won’t use extended due diligence as a free option on the property. Lenders want to lock in terms before rates move. All of this leads to more complexity in the deal.

What This Means for Dealmakers

The evolution creates both opportunities and tensions. Detailed LOIs reduce misunderstandings and can streamline the path to closing by resolving contentious issues early. The trade-off is that deal terms are now being negotiated at a stage once considered preliminary, meaning strategic decisions about price adjustments, risk allocation, and exit rights need to be made earlier in the process.

When Do LOI’s Become Binding?

Perhaps the most critical implication of longer, more detailed LOIs is the increased risk that they become binding contracts — even if that was not the intention. Courts may determine that the parties intended to be bound by the terms based on their actions (such as moving forward with financing and due diligence). Parties have found themselves bound by LOIs they believed were preliminary, forced to complete transactions they thought they were merely exploring, or held liable for backing out of what they assumed was non-binding.

Best Practices for LOIs

Given the potential for LOIs to become binding agreements, it’s important for all parties to proceed with caution. Here are some best practices for navigating today’s LOIs:

Before Signing:

• Engage experienced counsel early. Have advisors review and revise LOIs before execution to identify provisions that might create unintended obligations or limit your flexibility.
• Clarify binding versus non-binding terms. Ensure the LOI explicitly states which provisions are binding (typically confidentiality, exclusivity, expiration date, and expense allocation) and which are not; and consider whether or not the LOI should be fully executed.
• Understand what you’re committing to. Even non-binding LOIs can create practical constraints and reputational consequences if you walk away.

During Negotiation:

• Match detail to deal complexity. Simple transactions may not warrant lengthy LOIs; save comprehensive terms for complex deals where early clarity on material issues justifies detailed negotiation.
• Resist over-negotiation. Sometimes the strategic approach is to keep the LOI genuinely high-level, avoiding the temptation to negotiate every detail upfront.
• Preserve flexibility where possible. Consider which terms truly need to be locked down early versus which can be refined during diligence; and consider whether or not the LOI should be fully executed.

After Execution:

• Mind your behavior. Avoid acting as if you’re bound by non-binding terms. Funding deposits or beginning performance can undermine non-binding language and create enforceable obligations.
• Reassess enforceability risk. Have counsel evaluate whether the LOI might be treated as binding based on its completeness, context, and how parties are behaving.
• Document any material changes. If business terms evolve during diligence, memorialize changes in writing to avoid disputes about what was actually agreed.

Considering how to approach an upcoming LOI? Reach out to Loraina Lopez or another member of LP’s Real Estate Group.