For buyers and sellers, it's not just a letter of intent.

Before the lawyers or accountants, sometimes before potential buyers and sellers, have fully thought through the deal, a term sheet or letter of intent ("LOI") is signed because, well, it's just an LOI. They want to tie up the right to buy or lease a site or the terms of the sale and show that they mean business and, well, it's just a LOI--right? Wrong.

In the following Q&A interview, Ivan Kaplan, Esq., of the Livingston, N.J.-based law firm Becker Meisel, offers advice on how to structure an LOI to avoid potential issues with confidentiality and exclusivity as well as how to handle breach of binding provisions.

Q. First things first--can a letter of intent be binding?

A. Yes, an LOI may be binding and enforceable if it includes such material terms as the parties, the price and the property, unless it clearly states that it is not binding.

For buyers or sellers wanting the LOI to be non-binding, it should include language to that effect, but there might be issues that buyers or sellers do want the parties to be bound by, such as confidentiality, no-pirating and no-shop provisions. These items can be excluded from a blanket non-binding provision.

Q. What can buyers and sellers do to maintain confidentiality?

A. Protecting disclosure of even the fact that they are thinking about buying or selling a property can be critical. A good idea is to limit the use of information to the evaluation of the potential deal and restrict disclosure to only those who need to know in order to perform that evaluation. The LOI can make clear that confidentiality is binding and survives termination of the LOI, and both parties should decide up front when and how to disclose the transaction. They can stamp the LOI and other proprietary information with a confidentiality stamp. If a breach of this provision arises, the LOI has set up a basis for enforcing each party's rights in court.

Q. How can the LOI ensure that the sellers are not "shopping around" for other buyers?

A. The LOI should include a binding "no-shop" or exclusivity provision, which is an agreement to neither seek another deal nor accept another offer for the term of the LOI. If the priority was to lockup first crack at a deal, to sign an LOI that does not include such limitations has little point. In the evaluation stage, costs can build up quickly. Potential buyers may need to retain lawyers to draft a definitive agreement and other experts to help decide preliminary issues such as wetlands or zoning before committing to the cost and expense of a definitive contract. All of this money--and effort--could be wasted if the seller accepts another offer. A lawsuit could be filed, although it is very difficult to win an action for breach of a provision that was not included in an otherwise non-binding LOI.

Q. How can the LOI protect potential buyers and sellers if a breach of one of the binding provisions occurs?

A. The LOI should address indemnification and liability for breach of terms. For example, what if the seller finds another buyer despite the no-shop provision? It may be difficult to quantify damages. The LOI can include a provision that if the no-shop is violated, the seller will pay for all of the reasonable costs incurred by the buyer plus a reasonable break-up fee. Also, each party may want to limit liability to actual costs and expenses with no consequential or punitive damages.

What if proprietary information is divulged or used? The LOI can state that if confidentiality is violated, the non-breaching party "will suffer irreparable harm" and, therefore, has the right to go to court and obtain a temporary restraining order. Violation of the confidentiality provision may harm third parties as well. The parties can have some protection from third-party law suits by providing that the breaching party will indemnify the other party from any resulting third-party liability.

Q. Should structure of the deal be addressed in the LOI?

A. Structure of the deal is often not addressed in the LOI but should be. For example, splitting or combining lots may help with zoning, environmental or tax issues. It is best to be of one mind even at the LOI stage.

Q. What happens when the evaluation period expires?

A. While the LOI should have a general provision that it may not be modified except in writing signed by both parties, the LOI may provide for an extension of the term for a set period if the buyer is pursuing its evaluation in good faith. Another concern at the end of the LOI is how to deal with confidential information.

A provision should be made for the destruction or return of all originals, copies and charts or data developed from such information if the deal does not go forward. This provision specifically should survive termination of the LOI.

The bottom line is that there is no such thing as "just" an LOI. A good LOI can help potential buyers and sellers avoid a bad deal or better structure a good one. Take the time to do it right.