Make Letter of Intent Terms as Specific as Possible

Don't be surprised when a new tenant that has decided to rent office building or shopping center space from you wants to make requests early in the lease negotiating process. Typically, tenants make these requests in a letter of intent (LOI), a document that's signed by the tenant and owner indicating both parties' intent to sign the lease that they're considering. The LOI is your chance to clarify key terms and make sure that the tenant doesn't approach you later claiming that it misunderstood what would be included in the final draft of the lease. That's because the LOI states certain agreed-upon terms, such as the rent, move-in date, hours of operation, and any other details that are fundamentally important to the tenant's operation, as well as the understanding that other terms will be decided later during formal negotiations.

Don't be fooled by the preliminary nature of an LOI. It serves the important purpose of setting the stage for a lease that you'll have to live with for at least several years, depending upon the length of the initial term and any renewal options. Make the best use of an LOI by getting the tenant to make its terms as specific as possible without committing to terms that could limit your options later.

Push Tenant to Commit

Savvy tenants that have had experience with LOIs know that they should avoid openly discussing any issues that they may be able to use to gain leverage in later lease negotiations. “Some tenants will be clear in the LOI about what they want the owner to commit to—without offering their own commitments,” says lease management and administration expert Elizabeth Ferrara. Even though it's a bad idea, tenants that don't have much experience with LOIs may be tempted to put everything they're willing to commit to in the document, she notes. Try to pin tenants down to specifics before you reach the negotiation stage, so they have fewer “chips” that they've saved to bargain with. Also, avoid open-ended language in your LOI.

Give Preview of Terms

Although you and the tenant will mostly likely be noncommittal about many terms, you should also remember to openly discuss items that could be deal breakers if the tenant finds out about them later. Then you've wasted your time because there was no communication about a key reason why the space would've been profitable for the tenant, and you're back to square one looking for another tenant to fill the spot. For example, make sure that you and the tenant are clear about whether you can provide the tenant's absolutely necessary requirements, such as certain buildouts that it can't operate without or operating hours that are different from other retailers if the nature of the business requires it to open early before or stay open past center hours.

Once you've determined that the space will work for the tenant, you'll reach the stage where the tenant will most likely ask you to pay for certain items, such as giving it a tenant improvement allowance (TIA) for those buildouts, which could be expensive. If you're afraid that you'll commit to something, like the full cost of construction to the space, that you might want to change later, such as asking the tenant to match the amount of the TIA, ask your attorney about using this type of Model Language to make some or all of the terms in the LOI nonbinding—that is, not legally enforceable.

Model Language

This Letter of Intent shall not be binding upon Tenant and Landlord until a lease has been executed and delivered to both parties.

However, if you feel confident that you won't want to change the terms you've agreed to in the LOI and you want to lock the tenant into commitments it's made that are favorable to you, you could try to make the LOI binding using this type of Model Language:

Model Language

The terms and conditions provided in this Letter of Intent create a binding contract between Tenant and Landlord and will be binding upon and enforceable by both parties.

Be aware that there are benefits and dangers to using binding vs. nonbinding terms, Ferrara warns. “The issue of binding or nonbinding terms is a tricky matter,” she stresses. Every deal is different. “If you decide to use binding LOI terms, be careful not to say anything you don't really mean, just as you would in the actual lease,” she adds. (Look for an upcoming issue of the Insider for tips on when and how to use binding vs. nonbinding terms to your advantage.)

Don't Limit Lease Issues

It's critical to include essential items in the LOI that, if they're not formally included in the lease, will waste your time and resources. But don't give up the right to negotiate other important issues later.

Model Language

The parties acknowledge that this [insert binding/nonbinding] Letter of Intent does not address all essential terms of the lease contemplated by this Letter of Intent and that such essential terms will be the subject of further negotiation.

Avoid Delay

There should be clear time limits in the LOI for the tenant to complete lease negotiations and execute any other items you've agreed upon. “You need to have a way to extricate yourself from the deal if the negotiations drag on for too long, delaying collecting rent for the space while it sits vacant.

Model Language

For a period of [insert #, e.g., 90] days from the date of this Letter of Intent (the Negotiation Period), the parties shall negotiate with each other in good faith to finalize, execute, and deliver, within that period, a formal and final lease consistent with this Letter of Intent.

Don't miss the valuable opportunity to establish favorable rights for yourself that the LOI can present. “And make sure that you include any items that you don't want to be negotiated harshly in the future,” stresses Ferrara. That way, if the tenant proposes anything unusual later on, you can refer back to the LOI and argue that it wasn't part of the deal,” she says. “This is easier if the term has already been brought up in the LOI,” she emphasizes.

Insider Source

Elizabeth Ferrara: Lease Management, LLC; (917) 288-6162; leasemanagement.webs.com; mzliz@aol.com.

Sidebar:

Cover Four Items in Letter of Intent

Elizabeth Ferrara of Lease Management, LLC recommends putting these items as clearly and fully as possible on paper if they are favorable to you as soon as the tenant agrees to them.

• Tenant allowances. Include in the LOI any buildouts or construction that you're willing to do for the tenant and what contribution, if any, the tenant will make to them. This is a good place to specify TIA issues, such as the amount and whether the tenant will have to match it.

• Monetary concessions. Memorialize common area maintenance (CAM) charges, free rent, or rent abatement terms. But try to keep terms like under what circumstances the tenant has the right to withhold or reduce its rent as vague as possible. And avoid setting any caps on CAM in the LOI.

• Complicated issues. Clarify in writing any contentious or detailed issues that have been worked out in your favor, says Ferrara.

• Completed negotiations and promises. Note any terms that already have been completely negotiated and agreed upon in your favor or promises the tenant has made in the LOI. “Promises during this stage are often forgotten during negotiations and don't make it into the lease,” says Ferrara. Terms that are in the LOI are less likely to be forgotten.

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