Break Fees in an LOI

October 26, 2022

by a searcher in Chicago, IL, USA

What to do when a broker pushes back on a break fee?

I included a break fee in an LOI I recently sent. The broker said they their buyer will not accept a break fee.
For me this is a red flag because why would the buyer or broker not accept a break fee unless they had
an idea to not complete the transaction?

Has anyone been in this situation before and if so, how did you hande it? I am worried that I will do alot
of work and then have the owner pull out of the transaction.

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Reply by a searcher
from University of Rochester in Dallas, TX, USA

If I'm interpreting the situation correctly, that you want a break fee if you fail to get from LOI to signing, I would NOT view this as a red flag. I think it's unreasonable ask, especially if you aren't offering to reciprocate (i.e. you pay a break fee too if you walk away). LOIs are intended to be non-binding, either side can walk away. at any point. I can understand your rationale for wanting one, but the broker has probably never seen one included so not surprised he is flat our rejecting.

If you are anticipating a separate sign and close, and are just trying to propose a break fee in advance, that's different, but I'd say it's not worth fighting over at this stage.

Reply by a searcher
from Hillsdale College in New York, NY, USA

Break fees are only applicable to purchase agreements with non-simultaneous sign and close (large asset transactions, transactions with regulatory review, or other similar situations). LOIs are always non-binding and I have never seen a break fee. In fact, at least 50% of LOIs do not end in a transaction (usually because the seller was hiding something, in my experience). You don't want a break fee either, because until you've completed your diligence you need to be ready to back out if you find any red flags. A break fee makes a good investment decision harder for you to make.

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