In commercial real estate, a term sheet is a crucial document that outlines the basic terms and conditions under which an investment will be made. Although not generally legally binding, it serves as a framework for the more detailed and legally enforceable agreements that will follow, such as the lease agreement, purchase and sale agreement, loan agreement and other similar documents. Understanding the components and purpose of a Term Sheet is essential for anyone involved in commercial real estate transactions.

In general, the Term Sheet has the following purposes:

• To clarify the key terms of the transaction. The term sheet outlines the fundamental terms of the deal, including financial details, the timelines to be followed and the obligations of each party to the transaction. This helps all parties to understand the key aspects of the agreement before moving forward with more detailed legal documents.


• To facilitate the negotiation by providing a clear summary of the proposed terms. The Term Sheet allows the parties to it to negotiate the specifics without delving into all the legal complexities. It serves as a negotiation tool to resolve major points of contention early in the negotiation process.


• To reduce legal costs by agreeing on the main terms upfront. The parties can reduce the time and expense associated with drafting and revising more complex legal documents. This streamlining can lead to significant cost savings in the transaction process.


• To establish the intent of the parties while not legally binding them until the appropriate documents are executed. A Term Sheet signifies a serious intent to proceed with the transaction thereby helping to build trust between the parties involved.

The key components of a Term Sheet are set forth below:

• Basic Information – This includes the names of the parties involved, the property address and a description of the property.


• Purchase Price or Lease Terms – The proposed purchase price or lease terms, including rent, lease duration, renewal options and any escalation clauses.


• Financing Terms – Details on how the transaction will be financed, if financing is required, including the down payment, loan amount, interest rate and the repayment schedule.


• Due Diligence – The timeframes for due diligence periods, during which the buyer or lessee can inspect the property and review the appropriate financials.


• Closing Conditions – The conditions that must be met before the transaction can be finalized, such as obtaining financing, satisfactory completion of due diligence and obtaining the necessary regulatory approvals.


• Contingencies – Any contingencies that could affect the transaction, such as zoning approvals, environmental assessments or tenant improvements.


• Deposit – Information on any deposits or earnest money to be paid, including the amount, timing, and conditions for refund.


• Confidentiality – Clauses to ensure that the terms and details of the transaction remain confidential.


• Exclusivity – If applicable, a period during which the seller or landlord agrees not to negotiate with other parties.


• Non-Binding Nature – A statement clarifying that the Term Sheet is not legally binding, except for certain provisions like confidentiality and exclusivity, if included.

Conclusion
A Term Sheet is an essential preliminary document in commercial real estate transactions, setting the stage for detailed legal agreements by outlining the key terms and conditions of the transaction. It facilitates negotiations, clarifies expectations and helps to reduce legal costs by ensuring that all parties are on the same page before proceeding with binding legal agreements. For anyone involved in commercial real estate, understanding and effectively utilizing Term Sheets can streamline the transaction process and contribute to successful deal-making.