Commercial Lease Negotiation: Letter of Intent to Rent

A letter of intent for a commercial lease is a lot like a test drive for a car. If you like the car's features and handling, you'll probably decide to sit down with the salesperson and hammer out a deal. Like a test drive, a letter of intent lays out a basic framework for a lease so that the tenant and landlord can decide if they want to spend the time and money to move ahead with negotiations.

What Is a Letter of Intent?

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.

Why Prepare a Letter of Intent?

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.

A Letter of Intent Isn't Legally Binding

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.

Example of How to Use a Letter of Intent

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.

What Does a Letter of Intent Include?

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:

• the property address
• the names of the tenant and the landlord
• the size of the space you wish to lease and the suite number if applicable
• the length of the lease term and move-in date
• the rental rate and what it'll include (whether utilities, janitorial services, and the like will be included)
• a description of how you intend to use the space
• a statement that the letter isn't intended to be binding, nor is it meant to cover every item that might be included in the final agreement, and
• a promise that neither tenant nor landlord will attempt to strike a deal with someone else while you're in negotiations (until you sign the lease or one of you walks away).

In addition, you should include items that are dealbreakers for you. These might include such things as:

• the number and types of parking spaces (reserved, covered, or surface) available to your business and the cost
• renovations and who'll pay for them
• sublease rights
• lease renewal and space expansion options, and maybe contraction rights
• the hours when you can access the building or utilities such as air conditioning
• exterior building signage or monuments, and
• free rent and other landlord concessions.

Ask for the Terms You Want, but Be Ready to Negotiate

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.

What If the Landlord's Letter of Intent Doesn't Work for You?

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.