When buying or selling real estate, it can be wise to start with a letter of intent (LOI) before signing the final contract. Many believe that such a letter is merely a “non-binding statement of intent,” but the reality is more complex. In this article, we take a closer look at what a letter of intent is, when it may be binding, what elements it should include, and how to avoid common pitfalls.
What Is a letter of intent in a property transaction?
A letter of intent (LOI) is a document in which the buyer and seller express their mutual intention to complete a property transaction at a later stage.
Such agreements are typically used when the parties have agreed on the main terms but still need to finalize details—such as price adjustments, due diligence, financing, or zoning. The LOI provides a framework for further negotiations, ensuring structure and predictability in the process. At the same time, certain provisions of the LOI can be legally binding, even though the main purpose is to sign a final contract later.
Also read: Development and construction agreements—effective and important tools
Is a letter of intent binding?
This is a common question. Under Norwegian law, a letter of intent is generally not binding with respect to the actual purchase unless the agreement explicitly states otherwise. However, some clauses may be fully binding, for example:
- Confidentiality: Both parties commit to keeping negotiation details confidential.
- Exclusivity: The seller agrees not to negotiate with other potential buyers for a specified period.
- Duty to negotiate in good faith: The parties must negotiate in good faith toward a final agreement.
- Cost allocation: Specifies who bears expenses if the transaction does not go through.
In short: A letter of intent can be partially binding, but it does not necessarily obligate the parties to complete the property transfer. What matters is what is actually written in the agreement—and how the parties act afterward.
The difference between a letter of intent and a purchase agreement
A purchase agreement is legally binding and final, whereas a letter of intent serves as a basis for negotiation. Once key elements such as price, property condition, and contingencies are settled, the parties can sign the final contract. Only then does the transaction become legally binding.
However, be aware that in some cases an LOI can be so detailed that a court may find it binding—even if the parties believed it was merely preliminary.
What should a letter of intent include?
A letter of intent should be concise but clear, and cover the following points:
- Purpose and background: What the agreement concerns and why it is entered into.
- Preliminary terms: Price framework, conditions, and general principles.
- Due diligence process: The buyer’s right to inspect the property before final agreement.
- Timeline and milestones: Deadlines for investigations, draft contracts, and signing.
- Exclusivity: Any restrictions on the seller’s negotiations with others.
- Confidentiality: How information should be handled.
- Cost allocation: Who covers which expenses, such as legal or technical costs.
- Governing law and jurisdiction: Which country’s law applies (particularly relevant for cross-border transactions).
For large transactions—such as commercial properties or development projects—the LOI should always be tailored to the specific deal, as standard templates rarely cover all relevant details.
What happens if one party withdraws?
If one party withdraws after signing the LOI, the consequences depend on what is stated in the document.
If the purchase itself is not binding, either party is in principle free to withdraw without legal consequences. However, if the withdrawal breaches obligations such as confidentiality, exclusivity, or good-faith negotiation, the other party may claim compensation for financial losses—such as legal fees or other incurred costs.
Therefore, it’s crucial to review the wording of the LOI carefully and consider obtaining legal advice before signing.
Should you use a lawyer when entering into a letter of intent?
Even though an LOI may appear to be a simple formality, it can contain legally binding clauses with significant consequences. An experienced lawyer can:
- Clarify which parts of the agreement are binding.
- Ensure that the LOI is not interpreted as a final purchase commitment.
- Tailor the document to the type of property, project size, and specific needs of the parties.
- For professional real estate companies, a letter of intent is a tool to ensure a smooth and orderly process—not something to be signed impulsively.
Letter of intent—an important tool in property transactions
A letter of intent in a property transaction should not be viewed merely as a formality, but as an important tool to create clarity and security for both parties. It should clearly distinguish between the shared goals and the binding provisions. By explicitly regulating key elements such as confidentiality, exclusivity, and due diligence, you can reduce the risk of misunderstandings and disputes later.
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