You may have just received a letter of intent from your proposed landlord. What’s to worry about, other than spending some extra time on preliminaries? Plenty. You need to be very sure that the innocuous-looking letter does not turn into something you’re stuck with—a “binding” letter of intent, which may commit you to the rental terms as described in the letter. Unless you take steps, you may be legally stuck with the understandings in the letter, just as you would be when signing any lease or contract.
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:
“As we have agreed….” The landlord states that the two of you have agreed to the terms in the letter. This may create a binding letter (unless you do something about it, as explained -below).
“Unless I hear from you to the contrary…” The landlord lists the terms and then invites you to write back if you disagree. If she doesn’t hear from you, you may become legally bound.
“Yours truly, Mrs. Landlord.” The letter recites the terms of the rental and ends without any of the telltale phrases mentioned above. Even though the landlord hasn’t expressly stated that she considers these terms binding, they might become so unless you dispute them by writing your own letter (explained below).
It’s rarely a good idea to either receive or write a binding letter of intent. 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 a letter of intent? 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.
Responding to a Binding Letter of Intent
You may receive a letter of intent 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 may be far too specific and final for your tastes—for example, the letter may spell out a timeline for negotiations that either rushes you or stretches the process too much. For whatever reason, you may 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 may 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 may assume otherwise. For example, if you don’t respond to the landlord’s statement that the property will be available on a certain date and not earlier, you may 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 a letter of intent. 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 letter of intent. If the landlord’s letter recites—or even suggests—binding understandings, it is 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.
Watch Out for “Lease Form” Language
Your landlord’s letter of intent may 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 may 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.
This article was excerpted from Negotiate the Best Lease for Your Business by Janet Portman