Property jargon of the day: Letter of Intent

Every day, 99.co takes a piece of property jargon and explains it in English. Today, we’re looking at the Letter of Intent (LOI) for all you tenants:

What is a Letter of Intent (LOI)?

In the property market, an LOI is a prelude to another binding document, the TA. It is a preliminary agreement by a tenant to lease a landlord’s property, as well as the latter’s acknowledgement.

When the LOI is signed, it is almost always accompanied by a good-faith deposit, or booking deposit. The norm is one month of the rent for a 12-month lease, and two months for a 24-month lease. Note that this is convention, not an actual rule; there are a few rare cases where landlords accept an LOI with no deposit, or where the deposit has been more or less than the usual sum.

It is understood that, once the LOI is signed, the landlord will no longer pursue further tenants until the TA is signed. Once the TA is finalised, the LOI’s good faith deposit then becomes the security deposit.

Make sure the LOI is with the right person

Before you sign on the LOI, make sure you check out the landlord. The e-valuation list on the IRAS website is handy here; use it to make sure the person you’re speaking to is the real owner of the property.

Note that fraud involving the LOI is a favourite among scammers – they might pretend the property belongs to them, and then run off with the deposit money. If you have a property agent, they will go through the checking process for you.

It’s advisable to pass the LOI, with the deposit, directly to the landlord. This prevents any intermediaries from stealing it.

But LOIs don’t always result in a TA being signed

Let’s say you sign the LOI and hand over the deposit, but don’t sign the eventual TA. There are a number of reasons this can happen, the most common being:

• The prospective tenant or landlord changes their mind. This often happens due to new information. For example, the landlord may find out that the previous tenant illegally ran a business in a rental unit; or the tenant may discover the rental rates are unfairly high. To avoid this, use 99.co to check out rental rates first.
• TA turns out too different from the LOI. For example, the LOI may state that you’re allowed to keep pets, but then you discover there’s no such provision in the TA. If the landlord will not change the TA to match, the deal could fall through.
• Sudden change in financial situations. The tenant may suddenly find themselves ill and unable to work (thus making it impossible to pay rent until they recover), or the landlord may unexpectedly face foreclosure due to non-payment of the mortgage
• Job / schooling issues for the prospective tenant. Sometimes, a foreigner loses their job in Singapore, or for some reason leaves the school they’re attending here. This may cause them to pull out of the rental agreement.

What happens if the deal falls through?

In these instances, the following procedure is used to determine who keeps the deposit:

Should there be a clause in the LOI stating who will receive the deposit, if the deal falls through for some reason, that clause will be followed (your respective property agents should brief you on this, when going through the LOI).

If the prospective tenant was the one who chose to back out, then the landlord keeps the deposit.

Should the landlord chose to back out, the prospective tenant keeps the deposit.

ALSO READ: A complete 8-step guide to renting out your property without an agent

If there’s an insurmountable dispute because the TA is too different from the LOI, the prospective tenant should get the deposit back (unless it can be clearly shown that the TA and LOI are not unalike). These cases tend to end up in the Small Claims  Tribunal.

Finally, know that you can skip the LOI if the landlord is agreeable

There’s no law that stops you negotiating and signing the TA on the spot, without the LOI. While it’s less common, it’s by no means unheard of; so don’t be alarmed if a landlord suggests this.

If you’re 100 per cent certain you want to rent, and everything checks out (e.g. you ensured the landlord is the owner), go ahead and just sign the TA on the spot.

This article was first published in 99.co.