A letter of intent or “LOI” – also sometimes referred to as a term sheet or memorandum of understanding – is often the first stage of negotiating a lease. When drafted correctly, an LOI can set forth the main “business terms” that will be incorporated into a lease agreement (or other transaction-specific contract or agreement); however, an LOI does not lay out every specific deal point. One of the reasons for that is that all of the specific deal points go in the lease agreement itself, and the LOI is more so used as a tool to enable parties to ensure they are on the same page with respect to the key terms of the proposed transaction before they spend significant amounts of time and money on legal fees, due diligence and other pursuit costs. This article will discuss the various nuances of LOIs.
Why do landlord and tenants draft letters of intent?
As mentioned above, LOIs contain the main business points that will be set forth in a lease agreement. By having these deal points ironed out in advance of the drafting of the lease itself, landlords and tenants are able to save themselves a considerable amount of time and money. The LOI essentially provides the attorneys drafting and negotiating the lease agreement on behalf of their respective clients with somewhat of a firm starting point, as well as insight as to the issues that have already been addressed and agreed upon. Additionally, and perhaps more importantly, parties utilize LOIs to ascertain whether they have a “meeting of the minds” on the main deal points, often shedding light on each party’s desire, ability, and willingness to actually proceed with entering into a more formal, definitive written agreement with the other. If the parties are too far off on deal points, they can go their separate ways, look elsewhere for better opportunities, and save everyone time and money.
What are some key terms to be set forth in a letter of intent?
The truth of the matter is that the parties and their respective brokers and attorneys ultimately decide on the terms to include in (or exclude from) their letter(s) of intent. With that said, some illustrative examples of key terms that are commonly found in letters of intent for a lease include:
- the term or duration of the lease;
- fixed rent and additional rent (e.g., tax escalations, CAM charges, etc.);
- security deposit;
- maintenance, utility, and repair obligations;
- renewal options;
- demolition clauses, recapture rights and other termination options reserved by the landlord;
- assignment and subleasing rights;
- landlord or tenant work obligations, as well as concessions (such as a tenant improvement allowance) with respect to same; and
- local law 97 obligations.
Is a letter of intent binding on a party?
Parties can make an LOI (or certain terms and provisions thereof) binding but, more often than not, brokers, the parties themselves, and their respective attorney make it a point to have the LOI expressly state that it is not binding on either party. There are many reasons to do this. Although the LOI sets forth the parties’ intent to enter into an agreement, and covers some of the specific deal points, considerations such as market conditions, changes to a party’s financial position, or the availability of other more desirable opportunities make it important to preserve a party’s ability to walk away from the proposed transaction without consequence or penalty.
Clearly, there are several factors to consider when negotiating an LOI. When looking for a new space and negotiating a letter of intent, it is crucial that you are represented by an attorney who understands the implications of how various LOI terms and provisions can affect your proposed tenancy and the likelihood of the landlord accepting your offered terms. For more information on LOIs, or for help on your next lease agreement, reach out to the knowledgeable real estate attorneys at KI Legal by calling (212) 404-8644 or emailing info@kilegal.com.
This information is the most up to date news available as of the date posted. Please be advised that any information posted on the KI Legal Blog or Social Channels is being supplied for informational purposes only and is subject to change at any time. For more information, and clarity surrounding your individual organization or current situation, contact a member of the KI Legal team.
_____________________________________________________________________________________________
KI Legal focuses on guiding companies and businesses throughout the entire legal spectrum. KI Legal’s services generally fall under three broad-based practice group areas: Transactions, Litigation and General Counsel. Its extensive client base is primarily made up of real estate developers, managers, owners and operators, lending institutions, restaurant and hospitality groups, construction companies, investment funds, and asset management firms. KI Legal’s unwavering reputation for diligent and thoughtful representation has been established and sustained by its strong team of reputable attorneys and staff. For the latest updates, follow KI Legal on LinkedIn, Facebook, and Instagram. For more information, visit kilegal.com.