Arizona readers Sandy and Jim, both 80, sent me this email with an offer they almost accepted: “We own 100 acres of land ideal for a solar farm and just received a letter of intent (LOI) from a San Francisco company wanting to lease it. All we do is pay taxes on it, so we were about to sign and return the document when we came across your article ‘Leases of vacant land for solar farms pose great risks to owners.’ What do you think of this LOI? Thanks.”
After reading, I handed the LOI to my paralegal, Anne, and said, “Please give me your opinion of this LOI.” She carefully went through the document. After handing it back to me, she said, “This has made not just my day, but my entire week. It is laughable. Thank goodness they found your article.”
Hanford, Calif., real estate attorney Ron Jones, who helped me with that earlier article, agreed with Anne. He explained the elements of a letter of intent.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
What is a letter of intent?
A letter of intent, or LOI, Jones says, “outlines the basic terms of a proposed contract, lease or option (and is) sent to the property owner in hopes that an eventual agreement will be accepted. Consider it a knock on your door, with an, ‘I am interested in your property on these terms.’ The ‘property’ can be anything from industrial machinery, a million-dollar yacht, a business, employment to land. In most cases, a letter of intent is not an enforceable contract, but some of its specific contents might be! So, if you receive one and are tempted to sign, it would be a mistake not to have it reviewed by a lawyer who can clarify points you might not fully understand.”
An LOI is essentially a “cut to the chase” designed to benefit the offerer by saving the time and expense of drafting a tailor-made agreement for someone who might be uninterested in selling or leasing the property.
Watch out for these clauses in an LOI
Jones cautions, “An LOI can lead to some real problems, especially if it contains language that was in the one sent to your readers.” For example:
Confidentiality. “This agreement will be treated in confidence and no disclosure will be made without Tenant or Landlord’s prior written consent, except as required by law.” (More on this below.)
Exclusivity agreement. “Owner agrees that until the earlier of (a) signing of a lease, or (b) 300 days after the execution of this LOI have passed, the property shall be withdrawn from the market and owners will have no discussions or negotiations with any third parties concerning its possible sale, lease or the offer itself.”
Jones points out, “Considering these two clauses together mean that this Arizona couple may be forbidden to discuss the terms of the LOI with their own real estate adviser, and the property will be in limbo for almost a year! Just imagine if much better offers come in? The owners can’t discuss them! This is over-reaching.”
It’s now or never. A cover letter to the LOI gave the couple two weeks to respond or the offer would lapse, resulting in the hoped-for response: “They are offering us a great deal of money per acre, and we certainly don’t want to let this thing die on the vine,” Jim wrote.
Jones’ take? “The solar farm developer is putting pressure on the couple, and it may be considered elder financial abuse since they know all about them — especially their ages. It is pure nonsense, because the land isn’t going anywhere. They should contact the company and say, ‘We understand you would like this signed quickly, but we need time to run it by our family lawyer.’ It is virtually certain they will agree and just ask to be kept informed.”
Jones adds, “And if the response is, ‘We need it by that date or all bets are off,’ then they’ve just done the couple a real favor, because these guys can’t be trusted.”
Unreasonably long due diligence time frames. Due diligence is designed to lessen risks to the party financing the project and to discover the potential impacts on the site. This may require input from civil engineers as well as archaeological, environmental, water, land and title experts. Typically, this takes anywhere from eight to18 months.
“However, it is a two-way street,” Jones underscores. “Before committing to a long‑term relationship with a developer, the owners need to conduct their own due diligence to be certain they are dealing with a legitimate company that has a good reputation. Therefore, research their online presence, including reviews and serious complaints and get references from others who have leased to them.”
The LOI had a total of five years’ worth of “extended due diligence days.” To Jones, “attempting to tie up the property for all these years is excessive. Even though the developer offered to pay some cash per extension, they could have finished their due diligence and said, ‘Sorry, we can’t do it,’ and just walked away.”
Consequently, we suggested to my readers that they could either attempt to renegotiate the offer or walk away. And they walked!
It’s always a good idea to consult with a lawyer if you receive an unexpected LOI.
Dennis Beaver practices law in Bakersfield, Calif., and welcomes comments and questions from readers, which may be faxed to (661) 323-7993, or e-mailed to Lagombeaver1@gmail.com. And be sure to visit dennisbeaver.com.
Related Content
- Five Things to Notice in Your Lawyer’s Bill
- How Far Should a Lawyer Go to Honor His Duty to a Client?
- What Lawyers Often Fail to Tell Clients About Litigation
- What Not to Do When You’re Going to Court
- Could ChatGPT and AI Change Delivery of Legal Services?
-
Ask the Editor — Tax Questions on Inherited IRAsAsk the Editor In this week's Ask the Editor Q&A, we answer tax questions from readers on the rules on inheriting IRAs.
-
I Asked Experts When It's Worth Splurging on Beauty and Skincare — and When You Can SaveSmart Shopping Experts agree that while you don't have to spend three figures on your products, some higher-priced items have value.
-
Retiring Early? This Strategy Cuts Your Income Tax to ZeroWhen retiring early, married couples can use this little-known (and legitimate) strategy to take a six-figure income every year — tax-free.
-
Ditch the Golf Shoes: Your Retirement Needs a Side GigA side gig in retirement can help combat boredom, loneliness and the threat of inflation eroding your savings. And the earlier you start planning, the better.
-
Roth IRA Conversions in the Summer? Why Now May Be the Sweet SpotConverting now would enable you to spread a possible tax hit over more than one payment while reducing future taxes.
-
A Financial Expert's Three Steps to Becoming Debt-Free (Even in This Economy)If debt has you spiraling, now is the time to take a few common-sense steps to help knock it down and get it under control.
-
I'm an Insurance Expert: This Is How Your Insurance Protects You While You're on VacationHere are three key things to consider about your insurance (auto, property and health) when traveling within the U.S., including coverage for rental cars, personal belongings and medical emergencies.
-
Investing Professionals Agree: Discipline Beats Drama Right NowBig portfolio adjustments can do more harm than good. Financial experts suggest making thoughtful, strategic moves that fit your long-term goals.
-
'Doing Something' Because of Volatility Can Hurt You: Portfolio Manager Recommends Doing This InsteadYes, it's hard, but if you tune out the siren song of high-flying sectors, resist acting on impulse and focus on your goals, you and your portfolio could be much better off.
-
Social Security's First Beneficiary Lived to Be 100: Will You?Ida May Fuller, Social Security's first beneficiary, retired in 1939 and died in 1975. Today, we should all be planning for a retirement that's as long as Ida's.
