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Letter Of Intent For A Commercial Lease

by on General

On Behalf of Lanard and Associates | Aug 4, 2016 | Firm News

What Is The Purpose Of A Letter Of Intent For A Commercial Lease?

A real estate letter of intent (LOI) is the skeleton from which a lease is drafted by the landlord’s attorney.  The letter of intent reduces to writing a preliminary understanding of parties who intend to enter into a contract, including contracts to purchase real property. The real estate letter of intent is intended to lay out the business terms of the lease. By its nature, a letter of intent does not bind the parties to the transaction, raising the question as to how it can still be useful. A real estate letter of intent is evidence of some commitment to the deal. A potential tenant to a location who has a signed letter of intent has a commitment in hand which will give him, her or it priority of anyone else who may have an eye on the property. Having laid a foundation on which a deal could be built, the landlord and tenant can feel more comfortable about putting in the effort, energy, and money that may be necessary to actually finalize the lease for the business.

What Does It Mean When It Is Stated That The Letter Of Intent Is Not Binding?

Letters of intent have potential drawbacks and should not be entered into without the advice of counsel. Although the letter of intent is stated to be non-binding, this just means that it does not create a binding contract when signed.  However, in my decades of experience in reviewing commercial leases for prospective tenants, the business terms that are in the letter of intent often bind the parties going forward and a landlord and the landlord’s attorney are often reluctant to renegotiate them during lease negotiations claiming that the business people have already agreed upon them. Therefore it is important to be careful not to sign a real estate letter of intent for the lease of a property for your business if you are not completely comfortable with all of the terms.

 What Are The Key Terms That Should be Included In The Letter Of Intent For A Commercial Lease?

The letter of intent is the preliminary document used by the landlord’s attorney to prepare the commercial lease for the tenant’s business location.  The letter of intent should contain the basic business terms.  The letter of intent should include clauses like the length of time of the lease (both initial term and any renewal terms), base and additional rent rates, square footage of the premises, permitted use, exclusive use, security deposit required, repair obligations of both landlord and tenant, any landlord’s work that has been negotiated, any tenant improvement allowance that has been negotiated and any other basic business terms on which the parties have agreed.  Other negotiated business terms, such as any anchor continuity provisions, co-tenancy provisions or other similar clauses should be in the letter of intent.

What Should Not Be Included In the Letter Of Intent For A Commercial Lease?

Sometimes the parties include the requirements of a personal guaranty of the tenant.  It is fine to include that provision in the letter of intent as long as all parties are completely comfortable with the provision.  As I stated above, although the letter of intent is stated to be “non-binding”, it is unlikely that a landlord or landlord’s attorney will renegotiate the personal guaranty when the lease is being negotiated, so it is often wise to leave the personal guaranty negotiations to the attorneys to negotiate at the time the full lease is being negotiated.

 If The Letter Of Intent For A Commercial Lease Is Negotiated Why Should You Hire An Attorney To Review The Lease?

Even though the letter of intent for a commercial lease has been heavily negotiated and you are satisfied with the terms, it represents only the skeleton from which the actual lease (which is the agreement that will bind your relationship with the landlord for years to come) is formed.  The lease contains many clauses which should be negotiated between the parties. The letter of intent for a commercial lease is the starting point with the basic business terms that are the framework of the lease. But the lease will have clauses that define other important aspects of the relationship which should be reviewed and negotiated.