In past posts we have discussed how valuable hiring a broker who is knowledgeable and experienced can be. This is especially true when it comes to being able to draft a letter of intent (LOI). When it comes to the commercial real estate space, we find that there are many questions that surround letters of intent, so we thought it would be important to discuss this topic in further detail. Our hope is that this blog post helps shed some light on what a letter of intent is and why it is an important part of understanding your commercial lease. You might also be requested to give a personal guarantee along with your commercial real estate lease.
A letter of intent (LOI) is designed to make sure that both parties involved are in agreement and have a clear and mutual understanding of the critical deal points in a future lease. An LOI consolidates the terms of the lease in writing prior to the commercial lease being prepared. Letters of intent are an important part of the leasing process, and if written well, they can help expedite and add efficiency to the overall negotiation of the lease.
The main goal of writing and submitting a letter of intent is to detail the business terms that the party drafting the LOI intend to agree on in the commercial lease. More often than not, we find that the letter of intent is written by the tenant’s broker. However, sometimes it can be initially prepared by the landlord and submitted to the tenant’s broker. The letter of intent is used for negotiating purposes as well, as both parties will review the drafts and negotiate them until everyone is confident they have agreed on the main terms. The letter of intent is used as the primary document for preparing the initial draft of the lease which is generally prepared by the landlord.
A well-written letter of intent will typically include all the important business terms for a commercial lease. The most common elements will include:
If your business has specific leasing requirements, such as parking spaces, sign requirements, operating hours, space for outdoor seating – you’ll want to make sure to include such requirements in your LOI. Since the letter of intent serves to focus on and document the terms that are negotiated by both parties, you’ll want to make sure your broker writes down anything you have agreed to, or anything you want to include in the deal that is material to your business. A good broker will have a template form letter of intent from previous negotiations to use as a starting point. Be cautious working with a broker that has not previously negotiated a letter of intent. Here are 8 Commercial Real Estate Negotiating Tips that might help in this process.
In almost all cases, a commercial lease letter of intent is created to be non-binding. It is not actually meant to be enforceable. With that being said, it is still very important to establish terms in writing, so any details can be worked out early on in the negotiation process of the forthcoming lease document.
Always make sure to have your broker carefully consider your LOI to make sure that you do not unintentionally present a binding offer. There can be certain terms in a letter of intent, such as confidentiality provisions, that will be binding on the parties to the deal.
Even though letters of intent loi document are very important from a legal standpoint as they are the basis of the lease, they typically do not include legal terms. You will not generally negotiate legal terms in an LOI.
Nonetheless, we suggest to have a lawyer and broker who are both experienced in commercial leasing take a look at a letter of intent to make sure it’s clear. LOI terms are often vaguely written, requiring some loose ends to be tied up. You can save a lot of money at the leasing stage if you spend the time and a little money at the LOI stage to make sure the terms are adequately discussed and confirmed.
Once you have agreed upon something in the letter of intent, it is considered insulting and bad to go back on that. Even if the letter is not binding and enforceable, it still is something that isn’t taken lightly. Deals can fall apart and relationships can be affected if someone tries to renegotiate a commercial LOI once parties have already agreed to terms. We see this happening more when the parties have not looked over the terms with someone who is experienced and knowledgeable during the negotiating stage. It is a good idea to talk directly with your broker and attorney about the letter of intent before signing it.
For more information on how to consider and draft your LOI for a commercial lease, please contact us today. Space Selectors provides resources you need for all your commercial real estate needs.