Tuesday, February 28, 2012

What is a letter of intent?

A "typical" "simple" real estate purchase in Wisconsin generally involves the use of a form "offer to purchase" contract.  Once accepted and delivered, this contract is binding upon both buyer and seller.  Subject to specified contingencies, according to the terms of the accepted offer, the buyer shall buy and the seller shall sell the subject property.

In more complicated transactions, the parties may enter into a preliminary agreement which is often called a letter of intent (or a term sheet).  Typically, the parties do not intend to create a binding contract during this phase of the negotiations.  Rather, the seller and the buyer intend to set forth a set of key terms on which they agree.  However, they agree upon these key terms subject to the condition that they come to agreement on the remaining terms.

For example, the buyer and the seller may agree on a price, a closing deadline, and a general set of contingencies.  It may be of benefit to both parties to document where there appears to be agreement before proceeding with the expense and effort of finalizing the purchase contract.  However, the parties should be careful that they do not create a binding contract if their objective is to only document part of what may be the final contract.

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