Letters of Intent in Texas Real Estate Sales

Topics Covered

Purpose of a Letter of Intent
Non-binding and Non-Contractual Nature of an LOI
LOIs in Non-Standard Transactions
Deal Points to Consider in an LOI

Major Deal Points

What Texas real estate transactions can benefit from using a non-binding letter of intent? Nearly all of them. A letter of intent (LOI or term sheet as it is sometimes called) is an easy, effective, and inexpensive means of determining if tentative agreement exists on material terms—and doing so early in the process before substantial time is invested in preparing a formal offer.

Often the parties think they have agreement on major deal points when they do not. Starting with a letter of intent is a painless and efficient way to: (1) concisely list material, essential, and non-negotiable terms; (2) determine the seriousness of the other side; and (3) avoid expending unnecessary negotiating time and expense. Core disagreements, misinterpretations, and ambiguities become immediately apparent as the parties work through the discipline of formulating an LOI.

It is not necessary to establish all major deal points in an LOI. There is nothing wrong with inserting “TBD” where appropriate.

Binding Versus Non-Binding Elements

Even though it is possible to include both binding and non-binding deal points in a single LOI, the best practice is to avoid doing this. It is generally a bad idea to mix binding and non-binding elements within the four corners of the same legal instrument.

To avoid litigation, the LOI should clearly stipulate that it is non-binding as to ALL elements, period, full-stop, end of story. Attempts to hybridized an LOI with an earnest money contract should be avoided at all costs.

So called “no shop,” confidentiality, and good-faith negotiation clauses muddy the waters by attempting to introduce binding elements into the LOI. These clauses should be avoided since they more properly belong in the earnest money contract.

An LOI is Not the Contract

Properly written, an LOI is not an earnest money contract and it should not look or sound like one. In fact, the best practice in LOI drafting is to use plain English and avoid legal jargon altogether. Save the legalese for the contract.

The participants want to be sure they are not formally binding themselves to any material terms, so the LOI should avoid phrases such as “buyer shall” or “it is agreed that. . . . “ That is contract language, not LOI language, and can form the basis of breach-of-contract litigation later.

Representations and warranties, agreements in principle, commitments to act within defined time frames, and any form of reliance language have no place in a non-binding LOI. The LOI is merely an informal means of setting the stage for what is to come. The correct sequence requires that the LOI be promptly followed by an executed contract.

An LOI that clearly states that it is non-binding and subject to execution of a mutually acceptable purchase and sale agreement is not a contract because there is a clear condition precedent that must be fulfilled before either party will be bound. Pappas Harris Capital, LLC v. Advance Hydrocarbon Corporation, No. 14-23-00224-CV, 2024 WL 3616716 (Tex. App.—Houston [14th Dist.] Aug. 1, 2024, no pet.).

The Statute of Frauds (Chapter 26 of the Business and Commerce Code) which requires than certain contracts be in a signed writing and contain all essential terms, does not apply to an LOI.

Preparation and Execution

Since an LOI is (or should be) a non-binding, non-contractual, unenforceable document, putting one together does not constitute the practice of law (so long as it is not accompanied by legal advice) nor is it considered the brokerage of real estate. In fact, many LOIs and term sheets in the real world are produced by real estate brokers.

It is not strictly required that an LOI be signed in order to accomplish its objectives. However, signing the LOI is preferable because it represents a psychological (if not legally enforceable) commitment by the parties to move forward.

Residential Real Estate LOIs

The utility of an LOI in a complex commercial transaction is self-evident. But what about residential real estate? Some brokers argue that LOIs should not be used in residential transactions, even when big dollars are at stake and complex or non-standard factors are present. This view is based on the dated notion that commercial deals are inherently more complex and expensive.

This no longer corresponds to market reality. Why should a transaction for a $750,000 commercial warehouse get better negotiating or contract treatment than a $2.5M home? And what if the residential deal involves non-standard features such as subject-to clauses, wholesaling (contract assignment), a wraparound, or any number of other creative approaches that are common in residential real estate today?

Consider wraparounds. After changes to the Finance Code in 2022, residential wraps are now more complicated than many commercial transactions—and there is not even a promulgated addendum for wraps. An LOI can definitely be a helpful first step.

Utilizing an LOI in a substantial residential transaction can help determine if the parties really have a tentative agreement on major deal points. Only if this is the case does it become worth the time and effort to put together a proper offer.

LOI discussions can also identify early in the process if an attorney will be needed in order to draft custom special provisions to the contract. The point is not to reach agreement on everything; the point is to get the main deal points down on paper, even if the list is (for the moment) incomplete. An LOI is where the expression “being on the same page” applies literally.

Texas Realtors LOI Form

TXR-1803 (Commercial Letter of Intent to Purchase) is a promulgated form available to brokers and agents who are members of Texas Realtors. The form states that “The terms of this letter of intent are not binding upon either Seller or Buyer” and goes on to provide a minimalist list of important deal points.

Can this form be used for residential transactions? Yes. The word commercial appears only once (in the title to the document) and can be easily struck and initialed. All the deal points after the title are applicable to residential as well as commercial transactions. Although expressly non-binding, the TXR form contemplates that it will be signed and dated by the parties. Signing an LOI does not make it a contract.

TXR-1803 is a good starting point. Beyond TXR-1803, there is no accepted standardized or promulgated form for a letter of intent in Texas.

Assembling a Real Estate LOI

A solid way to approach preparing an LOI is to work one’s way through the contract that will be used (the TREC 1-4, for instance) and identify as many anticipated agreed terms as possible. This would include an identification of the parties and property; the sales price and proposed financing; length of the option period; the amount of earnest money and any additional earnest money payable after the option period expires; option period extensions; any contingencies including for third-party financing; anticipated special provisions; assignability of the contract; names of brokers and attorneys; closing timeframe; and which party will prepare the contract.

Conclusion

It is difficult to imagine a situation where commencing a transaction with an LOI would be an outright mistake. Completing a brief but thorough LOI can be a substantial step forward for the transaction even if it is not signed by the parties.