commercial leasing: letter of intent basics

A letter of intent (LOI) outlines the basic terms and conditions of a transaction and serves as the foundation for negotiating the relevant agreement, such as a lease, purchase and sale agreement or loan documents.   It is meant to serve as a starting point, so there is a delicate balance between having too much detail and too little.  The LOI should clearly state that it is a non-binding agreement and is meant to serve as the foundation for a mutually agreed upon agreement to be executed by the parties.

This article will focus on an LOI for a commercial lease (we expect to address other agreements in later posts).  Key components of a LOI for a Commercial Lease include:

  • Property Details: the address, unit number or other identifier and square footage

  • Landlord Name:  this should be the true owner of the property so counsel has the proper information when it comes time to draft the lease.

  •  Tenant Name: same concept as above, however, there are additional factors to consider, including whether the tenant is a single purpose entity or shell corporation with no other assets.  If so, the Landlord may larger security deposit or a guaranty (corporate or personal – depending on the circumstances).

  • Lease Term: will state the duration of the initial term.  Renewal options may be stated here or separately in the LOI.

  • Rent:  should include the amount of rent to be paid, as well as any additional charges or fees, such as common area maintenance (CAM) charges, property taxes, and insurance (sometimes separated into two sections). These figures will generally be stated on a per square foot (PSF) basis.  Depending on the property type and lease structures, it should be clear if the CAM, taxes, insurance, etc. are passed through on a NNN basis or a modified gross basis with increases over a base year.  If the latter, the base year should be clearly stated.  Check out our separate article on lease structures.

  • Rent Commencement Date:  this section will state when the Tenant has to start paying rent, which, may be different from the actual commencement of the lease.  Generally stated in days, for example 90 days from Landlord’s delivery of the space.  Any parameters or conditions to rent commencement should be clear.

  • Use:  this section will describe the tenant’s use, while almost always relevant, the use is particularly important in retail properties, some reasons include:

    • The Landlord may want to control the tenant mix at the property and selected this tenant accordingly.

    • The Tenant may want an exclusive right for this particular use at the property, and can protect itself by clearly defining said use and Landlord granting it the exclusive right (provided one does not already exist).  If so, the terms or parameters of the exclusive use will be listed in this section, or perhaps its own section within the LOI.

  • Security deposit: this should include the amount of the security deposit and may state in the first round or two of the LOI that the amount is subject to Landlord’s review of Tenant’s financials (or as noted above, the financials of the Tenant’s parent or individual owner).

  • Guaranty:  in addition to the security deposit, the Tenant may be required to provide a guarantee for the performance of its obligations by another entity or individual.

  • Condition of the Premises/ Landlord’s Work: this section will define the manner in which the space will be delivered – vanilla box, build to suit, as-is, etc.  It may also state here or elsewhere in the LOI certain required parameters, such as certain electric capacity or size of the water service.

  • Tenant Improvements: in addition to how the space is delivered, there may be an allowance provided by the Landlord to the Tenant to cover all or a portion of the Tenant’s construction cost.  This can be stated on a PSF basis or a whole number.  The provision will also state when and how it is paid.

  • Signage: some tenants may provide their signage upfront to make sure it Landlord approves it early in the process.

The bulleted list above covers the basics, but deals, tenants, and landlords will have their own key points and nuances that may need to be addressed.  Other potential deal points may include items, such as a Co-Tenancy provision or blackout dates, which are relevant to retail leases.  We will expand on these items and methods to expedite the process in future posts.

This article is for general information, educational, and entertainment purposes only.  Establishing and implementing a strategy for a particular property encompasses many unique factors, and professional advice/services should be sought for that specific transaction or investment.

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