Using Letters Of Intent In Real Estate Transactions

Question: We want to rent a 7,000-square-foot home in Paradise Valley for two years for $12,000 a month. The owners live in Boston, and their attorney has drafted a letter of intent (“LOI”), which has been signed by the owners and forwarded to our rental agent for us to sign. Our rental agent says that the LOI is not binding on us, but simply states the basic terms of the two-year lease, e.g., 7,000-square-foot home, $12,000 monthly rent, and that the formal lease will be on the Arizona Association of Realtors (“AAR”) form lease. We have rented homes before, but have never signed an LOI. Although we agree with the terms in the LOI, should we sign this LOI?

Answer: Probably. LOIs are used frequently in commercial transactions to ensure that, before formal documentation such as the AAR form lease is signed, the landlord and the tenant have a basic understanding of the agreement between them before spending the time and expense of attorneys drafting formal documents and working with escrow companies. In other words, after you and the owner of the Paradise Valley home agree on the basic terms of the two-year lease, the lawyers will then draft these basic terms into the AAR form lease.

Note: Although an LOI is not binding, the representations in the LOI have to be truthful. For example, if the seller falsely represented in the LOI that the Paradise Valley home was 7,000 square feet, and during your inspection of the home after signing the AAR form lease, you discover that the home is only 6,000 square feet, you may be entitled to cancel the AAR form lease and get reimbursement from the seller for any attorneys’ fees or costs that you incurred in reliance on the seller’s 7,000 square feet misrepresentation.

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