Responding to a Letter of Intent

You might have just received a letter of intent (LOI) 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 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.

What Is a Binding Letter of Intent?

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.

What Does an LOI for a Commercial Lease Look Like?

An LOI will include most of a commercial lease's basic terms. For example, an LOI might include:

• a description of the commercial space
• the rent amount
• the term (length) of the lease
• the start date of the lease
• what activities are prohibited in the commercial space
• a sublease and assignment clause, and
• common boilerplate provisions.

What Language Makes an LOI Legally Binding?

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:

• "As we have agreed…." The landlord states that the two of you have agreed to the terms in the letter. This language can 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 can 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 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.

Responding to a Binding Letter of Intent

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.

Watch Out for "Lease Form" Language

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.