Buying Property Series: Letter of Intent vs Purchase Agreement
Finding the place of your dreams is exciting and can lead to rushing into making a decision, like signing documentation without really understanding the scope of what we are agreeing to. We have previously referred to the
Finding the place of your dreams is exciting and can lead to rushing into making a decision, like signing documentation without really understanding the scope of what we are agreeing to.
We have previously referred to the importance of getting advice before signing any paperwork. This is advice that applies to life in general, not just real estate.
Letter of Intent.
A letter of intent (LOI) is a document declaring the preliminary commitment of one party to do business with the other. As such, it should be a simple document, showing the main terms of the prospective agreement.
All the details and specifics are then negotiated in a comprehensive contract that can be drafted with plenty of time as the parties have already signed a commitment letter.
So, if this is a basic document, why is it important to be careful when signing?
A LOI is not supposed to be binding as these should be unilateral, which means only the interested party signs the document. Nevertheless, it is a common wrongful practice to include two signatories on what are often incorrectly termed “Letters of Intent,” thereby converting them into actual contracts by effectively meeting all the requirements for a contract to be enforced per the Costa Rican legislation.
It is common to see LOIs include conditions that should be addressed in the contract but that, in the name of simplicity, miss other important aspects. The ultimate goal of the LOI should be to secure the deal by showing the potential buyer’s intent to acquire the property. The moment an LOI goes into detail and includes two signatories, it creates obligations for both parties, defeating the purpose of the option of purchase.
A LOI must be straight and to the point and should not belabor the details. It should also be coordinated quickly and should not create complex obligations for the parties.
Purchase Service Agreement (PSA).
Once a LOI is presented to the seller, the actual agrements should be put in writting for the parties’ assurance.
This contract is usually known as Purchase Agreement or Purchase Service Agreement and it specifies all terms such as object of the contract, description of assets, price, methods of payment, deadlines, due diligence, obligations of parties, defaults, closing conditions, addendums, mortgages, risk of loss, and any other conditions agreed upon between contracting parties.
The same as the LOI, it is strongly advisable for an expert to review this document before signing as the PSA should guarantee that your interests are well protected.
By keeping your legal representation separate from the other party’s (or their representatives), you will make sure this document covers all your needs and shields you from liability while keeping you and your investment protected.
If you are the seller or buyer, real estate transactions usually involve a considerable amount of money. Therefore, the interests of the involved parties should be safeguarded in the best possible way.
A PSA disguised as a LOI is nothing but a poor contract that could leave both parties unprotected in the event of a dispute. This situation is more common than you might think, so having representation that will keep your best interests at heart is an important step toward safeguarding against any potential issues that might arise during the process.