Why do buyers need a Letter of Intent?

Letter of intent: why is a declaration of intent necessary?

But why is a declaration of intent necessary when the parties are already largely in agreement? “A letter of intent can be useful in more complex transactions – even if it noticeably slows down the brokerage process,” explains Heydecke. “For example, when the buyer first wants to conduct a comprehensive due diligence.” The term refers to the thorough examination of the transaction object, in this case the property.

Practical example: the parking garage’s structural integrity had to be reviewed

Torben Heydecke offers an example from his practice: “In the brokerage of a parking garage, the buyer wanted to review the applicable parking-space regulations and have the structural integrity of the building examined.” Together with the research of additional information, this process would have taken several weeks.

Therefore, a letter of intent was drafted in which the sale of the parking garage at a specified price and under certain conditions was agreed—provided that the examination produced satisfactory results for the buyer. The term of the declaration of intent was four weeks from the time all relevant documents and information had been reviewed and made available. “If the examinations listed in the letter of intent had taken longer, the timeline would also have had to be renegotiated,” says Heydecke.

Declarations of intent are not legally binding

The letter of intent is not defined by law, meaning it is not binding, even though attorneys should be consulted for its drafting. However, fair business partners adhere to it. In addition, a provision for damages is part of the letter. Damages may become due if the seller decides—despite the declaration of intent—to sell to another party during the predefined period. The original prospective buyer should not be left bearing the costs of the due diligence process or having invested time for nothing.

However, Heydecke notes that he has never encountered such a case in practice. “Anyone who signs a letter of intent generally has a serious interest in completing the transaction by mutual agreement.”

Letters of intent also advisable for medium-sized transactions

Current market conditions are introducing new dynamics: the shift from a seller’s market to a buyer’s market is leading to letters of intent being used increasingly in medium-sized transactions—not only in large portfolio deals.

This trend is primarily due to stricter financing conditions. Banks now impose more demanding requirements, such as higher equity ratios for commercial properties or proof of planned energy-efficiency improvements for existing buildings. These more complex review procedures can significantly extend the time required to obtain financing approval. In this environment, a declaration of intent offers both parties the planning certainty and realistic timeline needed to meet all requirements.