There aren’t many things in life you sign that are non-binding. Signatures usually mean a binding commitment. So why do so many multi-million-dollar aircraft transactions start with a non-binding Letter of Intent (LOI) rather than jumping straight to a binding purchase/sale agreement?Â
Do they even matter?
Initial Screen
The main purpose of the LOI is to ensurethat a buyer and a seller can align on the big-picture items for a potential aircraft transaction. There is no sense negotiating a purchase/sale agreement that can take weeks if the parties are unable to agree on basic terms. It’s better to find out quickly whether the parties are on the same page with a 1-3 page LOI instead of a 15-40 page purchase agreement.
Basic LOI Terms
Any good LOI should contain certain basic terms that will outline the deal and ultimately streamline the negotiation of the purchase agreement. Any LOI prepared by my firm contains the proposed purchase price, deposit amount, the escrow agent who will handle the funds and file documents with the FAA, the buyer’s inspection rights including a rough scope, timeframe, and ideally the inspection facility, the required condition of the plane and what the seller has to fix, the rights and limits of a buyer to reject the plane, timeframes for acceptance and delivery, and allocation of certain costs like flight expenses. Misalignment on any of these issues could result in wasted time and expense negotiating a purchase agreement that will never get signed.
“Gentlemen’s Agreement”
Despite being non-binding, an LOI is generally considered to be a “gentlemen’s agreement.” The only thing worse than leaving a term out of an LOI is trying to change an agreed term at the purchase agreement stage. Although a party is legally entitled to renegotiate any provision of the LOI, it is a quick way to lose credibility. Absent new information or a necessary change of plans, later changing a key term is considered a faux pas and will typically result in the other side walking away from the transaction.Â
Straight to a Purchase Agreement
There are a few simple situations where an LOI can be skipped. For instance, a simple purchase agreement may be more efficient if there is a verbal agreement on price, the plane is “as-is,” and the buyer can kick the tires and either close or walk away. Other “quick” transactions, such as older piston aircraft, can often be completed quickly with a purchase agreement where the stakes are low, and the inspection will be light. These transactions have fewer variables to negotiate, so alignment can be hammered out in the purchase agreement.
Another time to skip an LOI is during a time crunch. In the middle of December, when the parties are trying to get a year-end transaction accomplished, the week spent on an LOI could be better spent jumping right to a binding purchase agreement. Note that an email exchange can substitute for an LOI, although an email exchange could ironically result in a binding contract since it lacks the “non-binding” disclaimers contained in an LOI.
In sum, LOIs certainly matter. A well-drafted LOI will serve as the transaction template and smooth things out the rest of the way, ultimately streamlining the purchase agreement process.
Each transaction is unique, and there is no hard-and-fast rule on when to use an LOI. Rely on the advice of your aircraft broker and attorney, who have completed hundreds or thousands of transactions, on what will work best for your aircraft acquisition or sale.
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This article is not intended, nor should it be construed or relied upon, as legal advice. The comments, recommendations, and analysis expressed in this article are those of the individual author, John Farrish, and are purely informational. Each aircraft owner’s situation is unique and requires its own thorough discussion and analysis. This article does not create an attorney-client relationship between you and the author or his law firm. If specific legal information is needed, each person should retain and consult an attorney with knowledge of the subject matter.
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