A Memorandum of Understanding (MOU) is a document outlining an agreement that two or more parties have reached. Drafting the MOU is usually the first stage in the creation of a formal contract, and doesn’t involve an exchange of money. The MOU signals the intention of the parties to move forward toward completion of the deal. MOUs are used by U.S. and state government agencies, as well as in international relations.
What is Typically Included in an MOU?
- The purpose of the MOU
- Each party’s role in the agreement
- Any terms that need to be resolved
- The expected timeline
- Any disclaimers either party wants to make known
- The financial responsibilities of each party
Is an MOU Legally Binding?
While an MOU isn’t legally binding like a joint venture agreement is, it can be seen as smoothing the way toward a legal contract by acting as a blueprint. Presenting each party’s expectations, and clearly communicating the proposed steps, in the MOU helps to ensure all parties are informed and understanding from the early stages of negotiation.
However, as it is not legally binding, any partner may walk away from the proposed deal at any point without penalty, which could be a waste of time and resources.
Is an MOU the same as a Memorandum of Agreement, and a Letter of Intent?
The MOU, MOA and LOI ultimately amount to the same in the eyes of U.S. law. They are all drawn up to document an agreement on a deal and an intention to complete that deal, and none is legally binding.
When Would an MOU be Used in Commercial Real Estate?
In commercial real estate, an MOU is used for the sale or lease of a property, and might also be used when arranging financing. The MOU is used to negotiate the broad terms of the deal.
What Does an MOU for a Commercial Real Estate Purchase Look Like?
To facilitate agreement more easily and keep the document from becoming too lengthy, the MOU for a commercial real estate purchase will only include the most important terms for the deal, unlike the more detailed offering memorandum. It will usually cover the following:
- Name of buyer
- Name of seller
- Purchase price
- Concessions on the seller’s part
- Required documents for review
- Closing date
- Due diligence