The most common first step in the acquisition of an aircraft is for one of the parties, usually the buyer, to prepare and submit a letter of intent (“LOI”) to the other party. The main reasons for using an LOI are to express each party’s understanding of the basic terms of the transaction and to commit those terms to writing, at the outset, to confirm that the parties really have reached a meeting of the minds on those basic terms.
For aircraft transactions, the LOI is usually a short, one-or-two page document that includes the essential terms (e.g., identity of the parties and the aircraft, purchase price, deposit amount, pre-purchase inspection requirements, delivery conditions and selection of an escrow agent) of the deal. The LOI usually includes a provision requiring that the buyer submit a deposit to a specific escrow company within a certain number of days after the execution of the LOI. Additionally, the LOI usually contains a provision that it will terminate and be of no further effect if the final purchase agreement is not executed by a certain date.
Since the LOI is superseded and replaced upon the execution of the purchase agreement, a question that often arises is what is the binding effect of the LOI? If the parties intend to be bound by the LOI, it is important to include language that indicates which provisions are binding and which provisions are non-binding. Typically, an LOI will be enforceable as a binding contract if a meeting of the minds between the parties has been reached on all material terms and conditions, as may ultimately be determined by a court. Since the intent of the parties is not always easy to determine and the cost of litigation can be prohibitive, it is in the parties’ best interests to remove any ambiguity from the LOI and clearly state their intentions.
Given that the LOI is subject to the completion of the final purchase contract, is an LOI really necessary?
The LOI is a preliminary statement of mutual commitment. When a buyer finds the aircraft she has been searching for, the buyer will want the seller to commit to the basic deal terms that have been negotiated as quickly as possible. The complete details of the transaction will be addressed later in the purchase agreement. Conversely, the seller wants to know if the buyer is truly committed to the transaction, such that the buyer will place a significant deposit into escrow and sign an LOI to purchase.
However, given that the LOI is subject to the completion of a purchase agreement and may be non-binding, the obligation of the parties under an LOI often may be more of a symbolic commitment than a legal commitment. In almost all aircraft LOIs, the deposit is fully refundable, which means the buyer could change her mind at any time and receive a full refund of the deposit. If the LOI is non-binding or the purchase agreement is not agreed upon by the required date, the seller can sell the aircraft to someone else if a better deal comes along. It should also be recognized that it sometimes takes longer to put a mutually acceptable purchase agreement in place when a LOI is used if the parties have not specified a date upon which the purchase agreement must be executed.
Is the LOI necessary? The answer depends on the specifics of each deal and the wishes of the parties involved. If you are a prepared buyer and have assembled your acquisition team in advance of your offer and the essential business terms have been agreed upon by the parties, then skipping the LOI may be more time effective because a purchase agreement can be immediately generated and negotiated. Thus, the parties are able to save valuable time and effort by foregoing the LOI. On the other hand, if you are a seller who is unsure of a perspective buyer and uncertain of their financial condition, then starting with an LOI may be a useful tool to help the seller get comfortable with the buyer, and the deposit (even though refundable) may go a long way toward demonstrating the legitimacy of the buyer.
The decision to use a LOI or omit the LOI step is a question that should be evaluated with regard to each deal, the parties involved, and considering all the other variables involved so that a strategic, well-informed determination can be made.