A Letter of Intent (LOI) plays a crucial role in business transactions, especially in real estate deals. It typically functions as a non-binding agreement outlining the main points of a proposed transaction, such as the sale price, closing date and other key terms. An important part of the LOI is the definition of the due diligence period. Under this provision, potential buyers can conduct an investigation to identify and resolve potential issues with the property. Here, they can verify the property’s value, ensuring it aligns with the asking price.
Examination of the value of the property
Upon sending the LOI, negotiations begin and a thorough examination of the property takes place. This due diligence phase involves a detailed investigation to confirm the condition, value and legal status of the property.
Key activities during this phase include:
- Title searches
- Zoning assessments
- Environmental and engineering evaluations
- Reviews of leases and other contracts
- Physical inspections of the property (plumbing and electrical work)
When drafting an LOI, it must outline the specifics of how the seller can conduct the due diligence process. This involves detailing the necessary investigations, setting the timeframe for these and defining the seller’s role in facilitating the process.
Avoiding common pitfalls in the process
Successfully navigating the due diligence process can be challenging, especially for complex or large-scale properties. To ensure a smooth journey, it may be best to start the process as early as possible and maintain open communication with the seller. If the findings from due diligence are satisfactory, buyers can proceed to draft a purchase and sale agreement.
Finalizing the deal
Due diligence is an important step in commercial real estate transactions. It uncovers hidden risks and potential issues, enabling buyers to avoid unexpected costs and protect their interests. Plus, it forms the basis for the purchase and sale agreement. However, it’s crucial to remember that some terms not covered in the LOI may be negotiated during the final agreement stage as most parts of the document are not legally binding. Nevertheless, buyers should consult with a lawyer experienced in real estate law to avoid working through the process without guidance and making a crucial error.