A letter of intent (LOI) is a document used by landlords and tenants when negotiating a commercial lease. It outlines the basic terms of the lease, like the size of the space, duration of the lease, and rental rate. It's typically drawn up after the tenant has toured the space and had informal conversations about the terms the landlord is offering, and before tenant and landlord enter formal negotiations and sign the lease contract.
LOIs are typically prepared by the tenant, the tenant’s real estate broker, or the tenant’s attorney (if one is used), but some landlords prepare them also.
An LOI helps tenants determine whether the lease will meet their basic needs, such as when they can occupy the space and for how long. It also lets landlords know that your business is serious about leasing the space and assures the landlord that spending time and money to negotiate the lease agreement is worthwhile.
In many cases, the LOI serves as a guide for drawing up the lease agreement.
Unlike the lease agreement, an LOI is usually not a binding contract—neither party is obligated to accept the terms or repeat them in the eventual lease. As a tenant preparing the letter, you should be careful that you write a non-binding LOI so that you won’t be locked into terms at this early stage.
But you should carefully consider the terms you ask for anyway (as well as those you don’t ask for). Both you and the landlord need to be confident that what’s laid out in the letter is in the ballpark of an acceptable agreement.
If you’re at the receiving end of an LOI, any written response you make should include a clear statement that you consider the terms presented by the landlord to be non-binding.
Here’s an example of how tenants and landlords use LOIs. Let’s say you’re trying to lease space in a very tight market with lots of competition, and you’ve toured an office that's twice the size you need. You’ve been told that the office can be divided, but the landlord would prefer a tenant able to take the entire space.
You might be tempted to draft your LOI to say you want to lease all of the space because it'll get the landlord’s attention, and you’ll be able to negotiate for a smaller space later. But when you sit down at the negotiating table and significantly downsize your requirement, the landlord might walk away from the deal entirely. Far better to accurately represent any terms that you're not willing to compromise on, and sweeten your bargaining power by offering concessions on those you're willing to negotiate.
Because an LOI often serves as a guide for drawing up the lease agreement, you’ll want to include many of the items found in a lease agreement. But you should focus on the items most important to you rather than trying to cover everything. Importantly, if you have absolute dealbreakers (terms you must have or can't accept), make those clear.
Every LOI should include:
In addition, you should include items that are dealbreakers for you. These might include such things as:
When you tour a space, your broker or the landlord, landlord’s broker, or property manager will usually give you a general outline of the landlord’s terms. Most of the time, at least some of those terms will be negotiable. But a few external factors might affect the terms you're able to get. These factors include:
Market conditions. When there’s a lot of competition for space (known as a landlord’s market), chances are a landlord won’t be flexible on the rental rate or willing to offer concessions like free rent or free parking. Conversely, landlords in a tenant’s market might roll out the red carpet to secure a deal with you.
Your financial and credit history. Some landlords require you to submit financial statements with your LOI. Much like a lender, they use your financial and credit history to determine how much risk you pose as a tenant. Tenants with strong financials are likely to get better terms than those who are less financially secure.
The type of business you operate. Landlords with retail and restaurant properties often seek out the most popular operators because they help draw traffic to the property. It’s not unusual for these A-list retailers or restaurant operators to get more advantageous terms than other tenants renting at the property.
Landlord’s obligations to lenders and investors. A landlord making loan payments on a property might be obligated to show the lease terms to its lender before striking a deal. A landlord who needs lender approval will be less flexible on lease terms like rental rates. On the other hand, some publicly-held landlords might want to show investors that a building is operating at full occupancy and will be flexible on lease rates in order to fill the space quickly.
If you’ve received an LOI from the landlord that contains requirements that are too specific or terms you're not willing to accept, don’t just ignore it. Even if the letter is non-binding, ignoring it can give the landlord a false impression that might derail your negotiations down the road.
Instead, if you think that the two of you might still reach a consensus, write back and propose the two of you continue with informal discussions before the landlord writes another LOI. In effect, you’re rejecting the letter but asking for a clean start with a new one. Asking for additional discussion can slow down the process when you feel rushed into a decision, and it can help you propose alternatives that might be more acceptable to both of you.
]]>You need to be very sure that the innocuous-looking letter doesn't turn into something you’re stuck with—a “binding” LOI, which can commit you to the rental terms as described in the letter. Unless you take steps, you can be legally stuck with the understandings in the letter, just as you would be when signing any lease or contract.
An LOI (sometimes called a "term sheet") is used for larger, more complex transactions—for example, a commercial lease. When the terms of an agreement are lengthy and there are still a lot of smaller details to work out, the parties will often opt to sign an LOI. This letter isn't a substitute for the lease agreement but rather precedes the agreement.
The LOI covers the basics of the upcoming contract and puts into writing everything the parties have agreed on so far. For example, the LOI might include the description of goods or services, the price, the timeline of the transaction, and the general, agreed-upon responsibilities of the parties.
An LOI will include most of a commercial lease's basic terms. For example, an LOI might include:
So what does a binding letter look like? Sometimes, the landlord will clearly label it as such (“Dear Ms. Tenant, Please accept this binding letter of intent…”). More often, however, you have to examine the words and the tone.
Here’s what to look for:
It’s rarely a good idea to either receive or write a binding LOI. That’s because, from a practical point of view, there’s little you can do if the landlord disregards the binding nature of the letter and re-opens an issue. For example, suppose you receive a letter in which the landlord states that the monthly rent includes a certain number of parking spaces.
If the landlord has a change of heart at the negotiation table, you’ll have a choice: Either negotiate the issue afresh or sue the landlord in an effort to enforce the letter of intent. Do you really want to get into a legal battle with a landlord over an LOI? Of course not. It’s better to negotiate the issue now and, if the landlord won’t budge and the matter is important to you, walk away from the deal.
You might receive an LOI from your landlord that announces itself as a binding letter—or maybe it just has the telltale signs mentioned above. For the reasons explained, you don’t want to let a binding letter remain on the table. And even if it’s nonbinding, the preliminary understandings can be far too specific and final for your tastes. For example, the letter might spell out a timeline for negotiations that either rushes you or stretches the process too much.
For whatever reason, you might reasonably conclude that you can’t live with the tone, statements, or plan in the letter. But you’d still like to continue negotiations for this space. What should you do?
You might be tempted to simply ignore the letter. After all, you didn’t write it and haven’t signed it, so you aren’t committed, right? Wrong. Even though you may think that the letter is ineffectual, the landlord might assume otherwise. For example, if you don’t respond to the landlord’s statement that the property will be available on a specific date and not earlier, you could find yourself shut down by an indignant landlord when you try to negotiate the date during lease talks.
Far better to clarify the situation by responding in one of the following ways:
Put on the brakes. Send the landlord a letter that proposes more negotiations before the two of you exchange an LOI. If the landlord’s letter has rushed you, apply the brakes. A written request that you prefer to continue informal negotiations before taking the next step should signal that you aren’t ready.
Write your own letter. Write back with your own LOI. If the landlord’s letter recites—or even suggests—binding understandings, it's very important to set the record straight. Be careful, however, that the two of you don’t get bogged down in trading conflicting letters. If this begins to happen, it’s a sure sign that you don’t yet have a meeting of the minds on key points. Instead, back off and reopen the issues that divide you by simply talking about them. You can always reduce them to writing later.
Your landlord’s LOI might include a statement that the two of you will use a lease form prepared by the landlord, the landlord’s management company, or the landlord’s attorney. While this might seem like a benign detail, it can spell trouble ahead if the landlord thinks this means that you won’t attempt to change the language of the lease clauses (which have been drafted to favor the landlord, naturally). Once you relinquish your right to bargain, you’ve given up everything.
Many business owners negotiate LOIs and commercial leases themselves. But talks can quickly become complicated and legal questions might arise. If you need legal advice, consider talking to a business attorney with experience negotiating commercial leases. They can help you draft, review, and negotiate an LOI for your commercial lease.
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