While a Letter of Intent (LOI) is mentioned interchangeably with a Memorandum of Understanding or a Term Sheet and, in fact, serves a similar purpose, in Singapore, an LOI is often used in the context of renting a property or a flat.
The LOI is usually based upon a standard template and often considered a formality such that, prospective tenants sometimes sign it even without reading. It’s advisable both for tenants and for landlords to go through an LOI to make sure all the essential terms are provided for exactly as expected. You may also want to show the LOI to a lawyer before signing to avoid unexpected outcomes.
What is the Purpose of a Letter of Intent?
The LOI expresses the intention of a prospective tenant to rent a specific property from a landlord for a certain period of time and according to other agreed terms. As such, an LOI works as a preliminary instrument before concluding a Tenancy Agreement.
Although landlords may skip an LOI and rent out a property outright under a Tenancy Agreement, in reality, it rarely happens. Most rentals in Singapore start from signing an LOI, and many landlords would not commit to a tenancy without having a deposit (a “Good Faith Deposit”).
As such, a Letter of Intent fulfills several important functions:
- signals that the prospective tenant is seriously interested in a particular property and is ready to negotiate a Tenancy Agreement,
- stops the landlord from showing the property to other potential renters after landlord signs the LOI and cashes in the Good Faith Deposit,
- outlines the main terms of the prospective Tenancy Agreement,
- determines the obligations of the tenant and/or the landlord related to the Good Faith Deposit if the deal falls through.
Since an LOI is often prepared by the tenant’s agent, it may also include a provision to compensate the agent in case the tenant backs out.
Good Faith Deposit vs. Security Deposit
An LOI for renting a property in Singapore is commonly accompanied by a Good Faith Deposit payable by a prospective tenant to the landlord. The industry practice is usually that the amount of the deposit is one month per year of the lease.
A Good Faith Deposit is paid to demonstrate that the tenant is serious about renting the property. After the landlord and tenant sign a Tenancy Agreement, the Good Faith Deposit is either calculated towards the rental payments or converted into Security Deposit. The latter is kept by landlords during the whole period of the lease and either returned to the tenants after the tenancy expires or used to offset landlord’s costs in case of tenant’s default, such as non-payment or damage to the property.
What Terms Shall Be Included in an LOI
It’s essential to make sure that your agent or another person preparing the letter mentions all the important terms. Such provisions should include, among others:
- names of the parties and details of the property,
- date when the Tenancy Agreement should be signed,
- the period of lease and extension clauses,
- amount of monthly rent,
- amount of Good Faith Deposit,
- whether the Good Faith Deposit is converted into Security Deposit or calculated in monthly rent after the Tenancy Agreement is started,
- handling Good Faith Deposit if the Tenancy Agreement is not signed,
- issues that should be handled by the landlord before rent starts, e.g., repair of the air-conditioner or other fixtures, adding/removing furniture, etc.
It should be noted, that in case the Tenancy Agreement is not signed, it’s very difficult to prove that the deal has fallen through because of the landlord and return a Good Faith Deposit, should the matter go to the court. Thus it becomes even more important to have all the essential terms of the lease agreed at the stage of signing the LOI.
It’s also true that in case a tenant withdraws due to changed circumstances or for no reason at all, the landlord can sometimes forfeit the deposit.
Difference between MOU and LOI in Singapore
There is often a question if there is any difference between a Memorandum of Understanding and a Letter of Intent. Although, generally speaking, LOI and MOU can be considered as the same and often used interchangeably, in Singapore, these documents are used in a different context and provide for other consequences. Here is the outline of the main differences:
|Memorandum of Understanding||Letter of Intent|
|Used in business negotiations.||Used in the context of renting a property.|
|Made as an agreement to agree to outline the main terms of the future final contract.||Serves the purposes of confirming the tenant’s intent to rent and reserving the property for such tenant.|
|Usually not followed by any deposit or other form of financial guarantee.||Is accompanied by a Good Faith Deposit.|
|I can be considered binding by Singaporean courts.||Allows to back out of the deal; the Good Faith Deposit can be claimed back.|
As in some cases, tenants can lose a Good Faith Deposit after giving an LOI, it is advisable to have proper due diligence before the document is signed.
Firstly, the tenant should make sure that the landlord is the actual owner of the property and/or has the rights to rent it out. The tenants can make checks on their own, with the help of a lawyer or a buying agent if the tenant is sure that the agent is acting in good faith.
Secondly, it’s important to clarify the procedures related to handling a Good Faith Deposit for cases when the tenant has to withdraw due to changed circumstances. Typically, an LOI includes a provision that if the parties do not start a Tenancy Agreement during two weeks after signing the LOI, the deposit shall be returned to the tenant.
Finally, it’s advisable to provide the Good Faith Deposit by check or electronically to be able to prove that it was actually paid. For this reason, cash payments are not recommended.
As it can be difficult to return a Good Faith Deposit after it’s cashed by the landlord, the prospective tenants are advised to show the text of the LOI to an attorney. An experienced lawyer will make sure that the landlord has the right to rent out and that the tenant can get the Good Faith Deposit back if needed because of changed circumstances or for other proper reasons.