Using Attorneys Efficiently in Structuring Business and Real Estate Transactions.
Time value of money versus risk…
These basic concepts drive our business and investment decisions and an attorney’s representation of your interest should consider these concepts as well.
An attorney can help structure transactions to shorten the time period between when invested capital is advanced and when you start receiving returns. An attorney can also help reduce risk allowing achievement of greater investment returns at reduced risk thresholds; whether it’s day to day risk associated with operating a company or acquisition risk in a real estate investment. Attorney involvement early in a transaction can help you achieve those goals, but it is necessary to do so efficiently in case your transaction never materializes.
A letter of intent (or “LOI”) is a good tool for the principals to use to structure a transaction’s basic terms before committing significant resources (and expense) to the transaction. Most principals are adept at negotiating LOIs without an attorney’s assistance, however, it may be a good idea for a brief legal review prior to signing the LOI to ensure it doesn’t unintentionally create a binding agreement.
Attorneys and letters of intent
Transactions involve business deal points (e.g., whether to lease or purchase, price, location, size, length of term, options and rights of refusal) that the principals determine, often with the assistance of advisors, and legal terms (e.g., apportionment of liability and risk, representations and warranties, and indemnifications) that the principals determine with the assistance of an attorney. A non-binding LOI, signed by the parties, guides the preparation of a formal binding agreement and saves money by determining main deal points before turning the transaction over to the attorneys. If the parties have key “deal breaker” terms they must have to proceed with the transaction, they should negotiate them at the LOI stage to avoid spending money on due diligence and legal fees negotiating a formal agreement, only to have the deal fall through due to the inability to agree on a key deal point.
The more information provided in an LOI, the fewer points attorneys will have to argue over in the following agreement, thus saving time and money. While LOI’s are typically handled by the principals to reduce legal costs before the parties are ready to commit, early consultation with an attorney can help the principals structure key legal terms ahead of time so the attorneys later won’t have to expend time (and the client’s money) negotiating them. As a general rule, attorneys usually follow the terms of the LOI very closely since it is an expression of their clients’ intentions. However, too much information will make the LOI cumbersome and may intimidate a less sophisticated party that is not accustomed to complex agreements.
Non-binding letters of intent
Sophisticated business people understand LOIs are usually non-binding.
A friend once told me he “sold” his business, but he really only signed a non-binding LOI and expected the attorneys to work out the agreement terms. His “sale” never closed and I had to explain why he had no remedies when the buyer walked away.
Great care must be taken to ensure that the LOI is non-binding (if that’s your intent), otherwise, if the deal falls through, one party may try to assert that the LOI was a binding contract, which occurs more often than one would think. Often times a buyer/lessee is reluctant to sign an LOI (for fear of creating a binding transaction) and the seller/lessor does not want to “offend” the other side by asking them to sign an LOI. “I wish I had a dollar” for every time a client resisted using an LOI, only to have trouble later for failing to use one. What better way for a buyer/lessee to ensure the negotiations are non-binding than to get it in writing in an LOI? From the seller/lessor’s perspective, when the other side does sign an LOI there is a greater sense of commitment to the transaction, even though non-binding. If you are dealing with a party that is scared off by a simple LOI, you may not want to be working with them in the first place.
To ensure the LOI is non-binding, it should have express non-binding language and the parties should avoid making statements or taking actions implying that they have a “done deal” after signing an LOI as such actions could lead to an “implied agreement.” Courts will find an agreement existed based upon the parties’ behavior even though no written agreement was signed. In some instances, a non-binding LOI may specify some terms that are meant to be binding, such as confidentiality provisions protecting the seller/lessor and an agreement to take the asset off the market to protect the buyer/lessee during negotiation of the formal agreement. It can also be used to allow certain limited due diligence activities to occur pending the completion of a formal agreement. Neither side wants to waste time and money negotiating a formal agreement when some simple due diligence could have sped up a buyer’s decision if the asset failed to meet basic requirements. You should have your attorney review the LOI before signing it to ensure the language, either binding or non-binding, meets your intentions.
Binding letters of intent
In some cases, parties desire a binding letter of intent (or commitment letter), especially if they will suffer a detriment if the transaction does not close, like expending due diligence money, taking action in anticipation of a closing, or taking an asset off the market. Even though a letter may state it’s binding or be termed a commitment, a prudent lawyer will incorporate enough wiggle room (through vague and ambiguous non-committal language) to allow the client to get out of the commitment. Look for statements that the transaction is “subject to” other actions that are in a party’s “sole discretion,” further negotiation or other conditions. Look for language such as a party “may” (non-binding) take an action vs. a party “shall” (binding obligation). In practice, because binding LOIs or commitments contemplate further negotiation, they should not be relied upon as truly binding.
Why you should take the lead in drafting the LOI and agreement
Letters of intent are usually fairly simple and most transactional attorneys have a form of LOI they use for a given transaction to reduce the client’s cost of having the attorney prepare the LOI. Most important, the form of LOI for a given transaction should also dovetail into the form of agreement that the attorney would use; also reducing costs. The client’s decision on which side’s attorney will draft the agreement has a direct impact on attorney costs. Almost all transactional attorneys have template agreements they use on particular transactions; making small adjustments to fit the transaction. It is much easier for an attorney to use their own form of agreement that they are familiar with than to review and revise another attorney’s form of agreement. However, if one side conducts several similar transactions (such as a shopping center owner with multiple tenant leases), that party may logically insist on using their own form of agreement. More sophisticated clients will prepare the LOI, or use a form initially prepared by an attorney, and handle LOI revisions on their own but under the guidance of their attorney. However, you should always have your attorney review the LOI before presenting it in final form and subsequent execution.
What ‘s typically included in a letter of intent
LOIs typically address the parties’ names (and rights to assign), a description of the property/asset, price and method and timing of payment, deposit amount, method of taking title, escrow and title company, due diligence period, contingencies to proceeding with the purchase, confidentiality, and payment of closing costs, expenses and pro-rations. LOIs for real estate leases can be more extensive and can include the tenant’s trade name, notice address, square footage floor area, premises location, term, options to extend the lease, the lease commencement date, minimum annual rent, percentage rent, security deposit, guarantor, tenant’s use and exclusive use, maintenance of the premises, tenant improvements, signage, payment of taxes, insurance and utilities, common area maintenance and expenses, and assignment and subletting. LOIs for financing often address loan amount, term, interest rate (index and margin), interest-only periods, amortization, financial covenants, prepayment fees (if any), guarantors, and collateral. If you have material legal terms that you would like to address at the LOI stage to avoid protracted legal negotiations, speak with your attorney.
An attorney’s input during the LOI stage can shape legal issues early to avoid lengthy arguments later during contract negotiations, such as representations and warranties, closing conditions, indemnities and releases. If you can set these positions in the LOI stage, they’ll be off the table later when the lawyers are negotiating directly. Early coordination between attorney and client when preparing an LOI will help reduce the client’s risk, structure an efficient transaction, and reduce overall legal costs of negotiating the transaction.