Commercial Lease Letter of Intent (LOI) Basics
In an earlier post in our understanding your commercial lease series, we discussed the value of hiring a broker and briefly discussed letters of intent. We have had many questions about letters of intent recently, so I am taking a quick detour to address this topic in more detail. I hope this post helps to shed light on what a letter of intent is and why it is an important part of understanding your commercial lease.
What is a commercial lease letter of intent?
A letter of intent (LOI) is a document that includes the important terms of the commercial real estate leasing deal and consolidates those terms in writing prior to the commercial lease being prepared. The letter of intent is designed to ensure the parties are on the same page about major deal points early in the leasing process. Letters of intent are an important part of the leasing process, because a well written letter of intent will make the overall lease negotiation smoother and more efficient.
Who writes the commercial lease letter of intent?
Generally, the letter of intent will be written by the tenant’s broker, though sometimes the letter of intent is prepared by the landlord. The letter of intent details the business terms that the party drafting the letter of intent intends to agree on in the commercial lease. The parties will review and negotiate the drafts of the letter of intent until both parties are confident they have agreed on the material terms. The letter of intent is then the primary document the party preparing the lease (generally the landlord) will use to produce the initial draft.
What does a commercial lease letter of intent usually include?
A letter of intent will generally include all material business terms, such as the rent (base rent and expenses), what incentives, like tenant improvement allowances and free rent (aka rent abatement), will be included in the deal, and similar terms that each party wants to see in the final lease. If your business has any specific leasing requirements—things like parking, specific sign requirements, particular operating hours, outdoor seating requirements—you’ll want to make sure those are included in the letter of intent. The letter of intent serves to document the terms that are negotiated by the parties, so you’ll generally want to write down anything you or your broker have agreed to (and anything you may not have brought up so far that is material to your business). Your broker should have a good form letter of intent to use as a starting point.
Is a commercial lease letter of intent legally binding?
A commercial lease letter of intent is almost always designed to be non-binding, meaning that it’s not actually intended to be enforceable. But it is still very important for the parties to establish the integral terms in writing, so they can work out any details in the early stages of the lease negotiation.
Sometimes certain terms in a letter of intent, such as confidentiality provisions, will be binding on the parties. You should carefully consider your letter of intent to ensure it is not unintentionally presented as a binding offer and that you are not inadvertently entering into a binding agreement on certain (or all) terms.
Letters of intent are very important from a legal standpoint because they are the basis of the lease, but they don’t generally include many legal specific terms. That being said, often “legal” terms like assignment and subletting, insurance, and similar provisions will be included in the letter of intent to ensure the parties have time to prepare to meet the obligations and when those terms are material to the business operations of the tenant. But in all except the very high value leases, the parties don’t generally negotiate legal terms in the letter of intent.
Though the letter of intent doesn’t generally include many specific “legal terms” and is generally non-binding, it is still often beneficial to have a lawyer experienced in commercial leasing take a look at a letter of intent to make sure it’s clear. Often, the terms of the LOI will be written vaguely (both because of imprecise word choice and because it can be perceived by brokers as a good negotiating tact.) There will also often be loose ends that have not been tied up in a letter of intent, or missing terms will have inadvertently been excluded from the LOI. The parties can save a lot of money at the leasing stage by spending a little money (and time) at the letter of intent stage ensuring the material terms are adequately discussed and confirmed.
Also, understand that if you start changing your legal relationship with the other party without a better written agreement, the letter of intent may be looked to as strong evidence in any dispute over the terms of that particular relationship. Put simply: sometimes the letter of intent may be used for or against you legally even if not legally binding.
What else is important to consider when negotiating a commercial lease letter of intent?
It’s considered “bad form” in the real estate industry to go back on anything that’s been agreed upon in the letter of intent, even if the letter of intent is not technically binding and enforceable. A deal can sometimes fall apart, and relationships start out on the wrong foot, when the parties need or otherwise decide to renegotiate the commercial lease letter of intent after the parties have already agreed to terms in a prior LOI. This often happens when the parties have not fully considered the terms with someone experienced and knowledgeable and then find out at the leasing stage that they made mistakes in negotiating the letter of intent. It is a good idea to talk directly with your broker and attorney about the letter of intent before signing it.
Consider your commercial lease letter of intent in specific detail. You want to make sure that it’s clear, that it’s concise, and that it includes all the material terms.
For more information on how to consider and draft your commercial lease letter of intent (LOI), please contact us today. Check out the understanding your commercial lease series for more information on commercial leases and an in depth discussion of many of the terms you should consider including in your next letter of intent.