Key Terms in a Letter of Intent in Real Estate deals

A letter of intent ("LOI") is a short document that parties to a potential lease execute to establish basic terms.

The purpose of a Letter of Intent is to describe the outline of the transaction between the parties. It is important for the parties to settle differences about key issues such as the price structure and allocation of costs.

If a landlord will lose a substantial amount of money if a tenant backs out of a lease, but the landlord or manager doesn’t want to make the LOI binding (or the tenant refuses to sign a binding LOI) consider requiring the tenant to post a nonrefundable deposit that the owner will be able to keep if it decides not to lease the space.

Typical matters handled in a letter of intent:

• Identification of the premises
  • It is important to address whether certain space is “rentable” or “usable.” A misunderstanding on this can lead to issues later if the tenant is displeased about paying for space it can’t use for business.
  • Depict exactly where the space is in the building or center. In an office building, identify the suite number and attach a floor plan. It can be difficult if owners and tenants have a different understanding as to what space the tenant is ultimately renting.
• Involvement of any third parties (like brokers), and who is responsible for their fees.  It’s important to identify the real estate brokers. You should make a clear identification of the brokers’ right in the LOI and make reference in the LOI to a separate broker agreement. Like the confidentiality provision, a broker disclosure should survive the termination of the LOI and be binding.   You could include the following language:
  • Tenant represents and warrants to Landlord that no broker or finder was involved with this transaction, other than [insert names of brokers]. Landlord will be responsible for any commission or fee due or owing in connection with this matter, but Tenant will indemnify, defend, and hold Landlord harmless from any fees, costs, or other expenses associated with a breach of the foregoing representation.

In most states, the property owner is responsible for paying the commission and brokers can file a lien on the property if they’re not paid. Even if the deal doesn’t go through, there might be some broker fees. If you haven’t identified the brokers and made that binding, additional brokers could later try to claim a commission.

• Rental rate.
  • Be clear on whether the rental amount is a “net” number or a “gross” number. It’s common to see rent stated as a dollar-per-square-foot figure, but sometimes it’s stated as a monthly or annual flat number.
  • If the space itself isn’t clear as occurs (for example, when a tenant leases an entire floor of a building) and the exact measurement of the entire floor will be determined after the buildout—then you may want to charge a dollar-per-square-foot, rather than a flat amount. If there’s a reason the exact square footage might change down the road, consider whether the tenant would want rent to be set by the square foot.
• Responsibility for additional fees/costs.  Will there be any common area maintenance responsibilities or costs that the tenant is responsible for?  If so, list at least the categories and more specific information on costs if it is available.
• Responsibility for Building Projects.
  • If the tenant will be doing its own buildout, the LOI should specify whether an allowance will be provided. For a complex buildout, you should also include what costs are included. Are soft costs or hard costs intended to be paid for by the owner? Even fees for the same category of cost may be split between the owner and tenant. For example, some owners pay for certain engineering costs but not others. When an owner has an interior designer on staff, the question should be raised as to whether the tenant is expected to pay for those services out of its allowance or whether the service will be provided for free.
  • If the exact details of a certain item haven’t been decided yet, don’t feel pressured to come up with figures. For example, if the landlord has agreed to give the tenant a buildout allowance, but the exact scope of work will be determined later, that is acceptable.
• Security deposit.  Ideally this would be noted.  But, if is acceptable if there’s not specificity over something that hasn’t been decided yet like the exact amount of the security deposit if the landlord is still reviewing the tenant’s financials. That should be noted in the LOI that the landlord is still determining the security deposit.  If the landlord leaves the security deposit out, the landlord runs the risk that the tenant will infer that a deposit isn’t required.  Instead, say the security deposit will be determined “subject to Landlord’s review of tenant’s financial statements.”
• Unique Arrangements. 
  
  • Specialized assignment and subletting provisions should be set out in the term sheet.
  • Any early termination option, option to purchase, option to expand space, or other items that not every tenant gets should be listed.
  • A franchise tenant may be required by its franchisor to have the right to assign its lease to the franchisor without the landlord’s consent. If this is required, it should be included in the LOI.
  • If the tenant is expected to pay the landlord all or part of its profits from an assignment or sublet, that should clear ahead of time.
  • If the tenant the option to buy the property later, specify how that price will be calculated, such as the appraised value at the time of the sale.
• Non-binding Terms The landlord should insist if the lease isn’t ultimately signed, the parties can’t be held to the terms that were in the LOI. Generally, most owners and tenants want the document to be nonbinding until they have signed the lease.  However, if the landlord has taken the property off the market for an extended period of time for lease negotiations with a prospective tenant or incurred many fees—such as those for architects or attorneys it may be reasonable to have a binding LOI (or at least be entitled to some damages).

  There are two important terms that owners should want to survive a deal that doesn’t close. One is the confidentiality provision.  A good LOI should always have a confidentiality provision.  Landlords should ensure that the terms discussed are kept confidential afterwards.  The LOI language could indicate that even though the letter isn’t binding on both parties, the confidentiality provision is.

  Tenant, Landlord and their principal shareholders or partners, employees, agents, and representatives will not disclose the subject matter or terms or this letter of the transaction contemplated hereby unless written consent is obtained by Landlord or Tenant, which written consent may be withheld at either’s sole discretion.

Please reach out to the Goosmann Law Firm if you are landlord, property manager, owner, or tenant working on a Letter of Intent regarding  a lease or purchase of commercial property.  It is very important to have counsel involved from the outset to have clear delineation on the binding and non-binding terms.  We are committed to this level of customer service and will consider alternative fee arrangements.

Angela Madathil is a Real Estate Attorney and provides legal assistance to buyers and sellers of businesses, as well as business brokers in Nebraska and Kansas.   The Goosmann Law Firm team advises landlords and commercial tenants, as well as business brokers throughout the Midwest and has attorneys licensed in Iowa, Kansas, Minnesota, Missouri, Nebraska, South Dakota, and other states.