Guide to Letter of Intent – Property Transactions

A letter of intent (LOI) is an important document for property transactions in Singapore. An LOI outlines the initial understanding and intent between the parties to the transaction and sets the groundwork for the final transaction.

An LOI is typically used in commercial, industrial, or residential property lease transactions in Singapore. It is often regarded as a mere formality. Still, you should never sign an LOI without reading and understanding the terms.

This article will discuss LOIs, whether they are legally binding, why they are important, what to do before signing an LOI, what to include in the LOI, and what happens after signing the LOI. We will explain the difference between good faith and security deposits, plus what happens if the transaction falls through before signing the tenancy agreement.

We also explore whether you need a lawyer to draft an LOI and whether it is a legal requirement for a valid tenancy agreement.

What is a letter of intent?

In the property rental market, an LOI is a formal preliminary document expressing the prospective tenant’s interest and intention to lease the property from the landlord. It indicates that the tenant is not looking at other properties anymore and would like to negotiate a final tenancy agreement.

Is an LOI legally binding?

Usually, an LOI is not a legally binding document, but it sets the stage for a legally binding tenancy agreement. It puts all the parties on the “same page” regarding the rental property.

Why is an LOI important?

It shows commitment

An LOI assures the landlord that you are serious about renting the property. If the landlord signs the LOI, it stops them from showing the property to other potential tenants, and it usually means that you have secured the property.

It provides clarity

It is a platform where the tenant can set out their expectations regarding the property, the rent, renewal, special requests, usage, etc.

It sets up a negotiation platform

It sets the framework for negotiating the main terms of a final lease or tenancy agreement.

If the landlord disagrees with the proposed terms of the LOI, they can reject the letter or propose new terms.

Good practice before drafting or signing an LOI

Due diligence

As a prospective tenant, you should do your due diligence on the landlord and the property. Make sure that the person is the actual owner of the property and they have the right to lease out the property before you sign or pay any good faith deposits. Ensure that the property is legally suitable for the purpose you want to rent it for.

Protect your rights

Include and specify what happens to the good faith deposit where you or the landlord must withdraw due to changing circumstances. It is good practice to specify that the deposit will be returned should a final tenancy agreement not be drawn up within a specified time.

Seek professional advice

It is always good practice to seek advice from an experienced lawyer when drawing up an LOI. They can do the necessary checks and use the correct terms to protect your rights if the LOI does not lead to a tenancy agreement.

Terms to include in your letter of intent

Identify the parties

Include names and contact details of the parties and their representatives.

Property information

Provide a detailed property description, including its address, size, condition, and any pertinent features. Include any specific requests or modifications.

The proposed terms

If your LOI is a precursor to a tendency agreement, include the terms of the lease, e.g. rental amount, start date, duration, move-in date, renewal options, and tenant improvements. Are utilities included? Include any issues or special requests the landlord must attend to before the rent starts – repairs, fixtures, access control, etc.

Deposits

A good faith deposit is typically paid when signing the LOI. The LOI should also provide for a security deposit. The LOI should specify both amounts and whether the good faith deposit will be converted to the security deposit when the tenancy agreement starts.

You should also stipulate what happens to the good faith deposit if the deal falls through after the landlord accepts the good faith deposit.

Deadline for completing the transaction

Set a date by which the deal must be signed, including any grace periods, if applicable.

A diplomatic clause

If your lease is for more than 12 months, you can include a diplomatic clause allowing you to terminate the lease by giving due notice if you need to terminate the lease early.

Confidentiality

If you need to protect sensitive information, include a confidentiality clause to prevent the landlord from sharing your sensitive information with other parties.

What is the difference between a good faith deposit and a security deposit?

The main differences are their purpose and timing of payment.

A good faith deposit is paid upon signing the LOI to demonstrate a genuine intention and commitment to the transaction. It is usually only mentioned in the LOI and held in escrow until the deal is signed.

After the tenancy agreement is signed, the good faith deposit is typically converted to a security deposit or a rental advance. If needed, you only have to pay the security deposit balance.

A security deposit is usually specified in the LOI and the tenancy agreement. It is paid after signing the tenancy agreement. It is a form of security the tenant provides as a guarantee the tenant will pay the rent and maintain the property as agreed between the parties. If the tenant damages the property or ends the lease early, the security deposit can serve as compensation.

It is refundable when the lease ends, subject to any agreed-upon deductions.

Including clauses stating what should happen with your deposits is critical to avoid future disagreements.

What happens after you have signed and delivered the LOI?

Usually, the landlord will also sign the LOI. After receiving the good faith deposit, the landlord will send a draft tenancy agreement.

This should happen within the timeframe specified in the LOI.

The tenant then has time to review the draft tenancy agreement. The tenant can either sign the agreement if they agree with all the terms or start negotiations on the terms for a final deal.

What happens if the transaction falls through before signing the tenancy agreement?

Circumstances may change between signing the LOI and the tenancy agreement, or the parties might be unable to agree on the final terms.

If there is a clause in the LOI stipulating what should happen with the good faith deposit if the deal falls through, the clause should be followed.

Suppose the prospective tenant decides not to proceed with the deal after paying the good faith deposit. In that case, it may be forfeited to the landlord.

However, suppose the landlord backs out or the parties cannot agree on the final terms of the deal. In that case, the prospective tenant should be able to get their good faith deposit back.

Is a letter of intent a legal requirement?

The law does not require an LOI. A tenant and a landlord can negotiate and sign a tenancy agreement without a preceding LOI.

If you’ve done your due diligence on the property and the landlord, and both are happy with all the terms and conditions, you can enter a tenancy agreement without first signing an LOI.

However, an LOI provides an excellent blueprint for the final agreement.

Do you need a lawyer to write a letter of intent?

You don’t need a lawyer to draft an LOI. There are many templates that you can use for your LOI. However, it is critical to understand and include all the relevant terms and conditions to protect your rights and ensure a smooth transaction.

An experienced lawyer can help you navigate the issues and ensure your tenant rights are protected. Once the landlord has cashed the good faith deposit, it might be challenging to get a refund.

A good lawyer will assist with due diligence and ensure that your LOI contains all the necessary clauses for a smooth and safe transaction.

Conclusion

Letters of intent play a vital role in property transactions in Singapore. It serves to clarify the expectations, lay the groundwork for the final deal, and, if needed, set the stage for negotiations.

Although an LOI is not legally binding, a well-drafted letter can make the renting process much smoother and avoid drawn-out disagreements.

It is always wise to have an experienced lawyer review your LOI.