Why Letters of Intent (LOI) are an important business tool

KlasJet Boeing 737 LY-BGS

Jonathan Russell, Senior Associate in the Corporate Practice of Smith, Gambrell & Russell, believes that documenting the commercial aspects of a sale before handing the matter over your legal advisers will save time and money.

Opinions on this subject are frequently divided.  The use of Letters of Intent (“LOIs“) to confirm the details of a proposed sale can vary between a simple one page agreement as to the sale/purchase price of an aircraft and a detailed summary of the key commercial aspects of the transaction.  As a solicitor who documents such transactions, I am a firm believer that the latter approach is enormously beneficial to both the seller and the buyer.  Moreover, I believe that agreeing all of the commercial aspects of a sale before handing the matter over your legal advisers represents an opportunity to reduce the time and cost of concluding a deal.  If you present your legal team with a LoI which sets out the commercial terms of a deal then they should be able to wrap the legal terms around these, with the end result being that you get a sale and purchase agreement which meets your needs and your counterparty’s expectations.  In this context, I hope to demonstrate than LoIs are worthy of more consideration than some might think and I propose to highlight a few provisions which you may wish to consider including, or further detailing, in your current LoI.

1.  Purchase Price and Deposit

Clearly the purchase price is vital, however the LOI should stipulate how it is to be paid.  You may wish to consider allowing for an initial deposit which is payable prior to the visual inspection, followed by a further deposit payable upon conclusion of the visual inspection, with the balance of the purchase price being payable on delivery.  For the sake of both parties, it is also important to detail when and under what circumstances, the initial and/or further deposit will be refunded to the buyer if the sale does not proceed.

2.  Timing

Managing expectations early in the deal lifecycle can help avoid conflict at later stages.  The parties should agree, in so far as is possible, to detail the key transaction milestones, e.g. deadline for acceptance of the terms of sale/purchase, making payments, a deadline and window in which to undertake the visual inspection, timeframe in which to agree the sale and purchase agreement etc.   These timelines need not be set in stone, therefore provision for them to be extended by mutual consent should be incorporated.

3.  The Pre-purchase Inspection (“PPI”)

Aside from references to the location of the PPI, i.e. a manufacturer approved facility,  you may wish to agree the scope of the PPI.  From a seller’s perspective it is important to be clear what the PPI will include.  Conversely, a buyer should be certain it can perform a proper inspection of the aircraft before deciding whether to proceed.  In this way it also possible for both parties to ascertain the aircraft meets the delivery condition. 

4.  The Delivery Condition

Both parties need to be clear as to what is being purchased and/or sold.  The seller should specify the condition of the aircraft.  The buyer should be clear as to what condition it wants the aircraft to be in at delivery, together with any additional requests e.g. does the buyer want the seller to obtain an export certificate of airworthiness.          

If the aircraft does not conform to the delivery condition the parties should be clear how discrepancies will be dealt with; will there be a right to terminate, can the parties agree a compensation amount in lieu of remedying discrepancies, for example, the delivery condition may be defined to provide that the aircraft is delivered with the following:

• an export certificate of airworthiness;
  
• no material damage or corrosion;
• evidence of the completion of all ADs and any applicable SBs;
• current certificate of airworthiness;
• transfer of all maintenance service agreements.

 5.  Costs

Who will pay for what?  Be up front about costs, this will save time negotiating later – if you are not going to be able to agree commercial terms at the start of the deal then the parties can walk away before incurring additional expenditure.  It is generally assumed by parties to a transaction which party will pay for what though these “gentlemen’s agreements” do not necessarily hold much water if the transaction runs into trouble.  There is no harm in stating the obvious, equally if you have verbally agreed to share costs or that one party will pay for a particular item , put this in writing as soon as possible.

6.  Legal validity

A common complaint as regards LOIs is that they are not, generally, legally binding.  This is cited as being reason enough to hurriedly put together a LOI and go straight into drafting and then negotiating the sale and purchase agreement.  Whilst it is correct to say that LOIs are not legally binding, unless they contain all of the legal features of a contract, they do evidence a serious intent on behalf of both parties to conclude the transaction.  It is worth noting however that provisions regarding confidentiality and costs may be legally binding on the parties.

As stated at the beginning of this article, I believe LOIs are an important part in any aircraft sale and purchase.  More than that, I believe LOIs are a business tool.  If one were to invest time in drafting a comprehensive LOI this can be used again and again, it can be tailored to fit individual transactions and will be there, on hand, when you need it.  A professionally drafted, well constructed LOI will evidence a serious intent to a potential buyer or seller that you want to deal with them and this could, one may infer, make them want to deal with you.