Letter of intent and purchase price deposit

As part of our series of articles on letters of intent (hereinafter referred to as the “Letter” or “Letters“) in commercial transactions involving the sale of shares (https://endlex.ca/letter-of-intent-definition-and-purpose/), we will take a closer look at the down payment on the purchase price that may be made by the buyer to the seller at the Letter stage.¬†

1. Deposit on purchase price 

Depending on the nature of the transaction and the negotiations between the parties, they may agree that, on signing the Letter, the buyer should send the seller a down payment (also known as a deposit) on the purchase price, primarily to demonstrate the buyer’s seriousness about the forthcoming transaction and to reassure the seller to this effect. The amount of the deposit varies greatly depending on the purchase price and the seller’s negotiating strength. The deposit is often held in escrow by one of the parties’ lawyers, with release conditions to be discussed in the next paragraph of this article.¬†

If the transaction closes successfully, the deposit will be deducted from the purchase price, and both the deposit and the balance of the purchase price will be returned to the seller at closing. If the Letter is terminated prior to closing, then the terms of the Letter will determine the process for refunding the deposit, or the possible scenarios under which the seller may keep the deposit.  

Usually, down payments are more common in real estate transactions, but it’s not uncommon to see down payments in stock sales transactions, especially when the target company generates interest from several potential buyers. In addition, the deposit may sometimes be required by the seller as a compromise to accept exclusive negotiation rights after the signing of the Letter of Intent. (see – https://endlex.ca/letter-of-intent-and-excusivity-clause/)¬†¬†

Naturally, it can be advantageous for the seller to ask for a deposit, and it is recommended that the buyer only accept this type of condition if there are no other alternatives. For example, whenever possible, the buyer should provide proof of availability of funds for the purchase, in lieu of sending a down payment.  

In addition, it is very important to draw up conditions for the retention and reimbursement of the deposit, as detailed below  

2. Retention and repayment terms 

As mentioned above, the deposit is held in escrow with a third party, and the Letter usually stipulates that the deposit will be returned to the buyer in the following cases: 

A) Following the buyer’s notice of unsatisfactory due diligence; ¬†

B)If any of the closing conditions are not met, as provided in the Letter;  

C) If the Letter is terminated in accordance with its terms; or 

D) Upon fulfillment of any other event or timetable agreed between the parties to the Letter.  

It is therefore essential for the buyer to carefully detail the terms and conditions for the return of the deposit. It is advisable to anticipate and add all relevant closing conditions to the Letter (in fact, as many as possible) to allow for a refund in the event of non-compliance. 

Moreover, if the down-payment is sent because of a deadline or a particular event, the buyer must ensure that the conditions for reimbursement are clear and precise. 

3. Conclusion  

The payment of a deposit is an important aspect of letter negotiations, and it is in the buyer’s interest to negotiate good clauses to this effect to avoid any misunderstandings regarding the return of the deposit. Contact us to find out more!¬†

Information provided in this article is intended as general introductory information only. The information provided in this article is not legal advice. It should not be construed as legal advice and should not be relied upon as such. Should you want legal advice regarding the information provided in this article, please contact one of our lawyers. 

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