Negotiating Your Commercial Lease Letter of Intent
One of the largest costs for many businesses is their commercial lease. While business owners often hire an attorney to review the lease itself, it is not as common for them to consider retaining an attorney to assist when negotiating a letter of intent (LOI) related to the lease, which typically serves as the foundation to the eventual lease.
The checklist below offers some insight and issues to consider when reviewing an LOI. A downloadable PDF of this checklist is available here.
What is a Letter of Intent?
An LOI is a preliminary agreement between parties negotiating a lengthy contract that includes key terms of the proposed deal. Because it is focused on fundamental terms, an LOI is substantially shorter and less complex than the resulting contract (for example, a 45-page commercial lease I recently negotiated was based on a 3-page LOI).
Because an LOI is an efficient tool in determining if a deal is feasible between two parties, landlords often insist on executing an LOI before negotiating a full commercial lease. While this circumstance is not in and of itself a problem, it is important for potential tenants to agree with (or negotiate) the terms in an LOI before signing it, because landlords generally insist that the terms in the LOI be included within the resultant lease without further modifications.
What are some important terms to look out for in a commercial lease LOI?
While there is some variance in the critical terms included and negotiated in any LOI, the checklist below (while not exhaustive) includes some terms common across most types of leases. If any of the terms included in an LOI are not acceptable to you, whether or not they’re listed below, be sure to negotiate them.
Premises. Have the proposed premises been clearly defined regarding location and size? Consider including a floor plan as an exhibit, if available.
Right of Relocation. If the landlord can require you to move to a different location, what rights, if any, do you have regarding the relocation? For example, what sort of notice must the landlord provide, how often can the landlord force a relocation, and will the landlord reimburse you for relocation costs?
Parties. Are the landlord and the tenant both appropriately defined? For example, if you are renting the space through a separate business entity you have established, confirm that the business is listed as the tenant (and that you are not individually named).
Guarantor. Ensure you are comfortable with any proposed guarantor language (including named guarantors and length of guaranty).
Permitted Use. If your permitted use is defined, ensure that the language is flexible enough to cover your immediate use as well as any reasonably anticipated expanded use.
Commencement Date. If work needs to be completed before you can move in, are you entitled to damages or able to terminate the lease if such work is not completed in a timely manner?
Landlord’s Work; Tenant’s Early Access and Allowance. If build-out work or repairs need to be completed before you begin operations, ensure that any work, early access, or allowance that the landlord has agreed to provide is sufficiently detailed.
Lease Term. Ensure the proposed lease term is acceptable to you.
Renewal Options. Review the term and cost of any renewal options. Consider proposing renewal options if none are included.
Reduction/Expansion Rights and Termination Rights. Review any rights you have to expand/reduce the amount of space rented or to terminate the lease. Consider proposing such rights if none are included.
Rent and Other Lease Costs. Review all rent terms (e.g., rent rates, commencement date for rent, and any free rent period). Beware of rent increases tied to fair market rental rate and be sure that you understand and agree with any terms beyond base rent (e.g., common area maintenance and triple net expenses), which can substantially increase your ongoing costs.
Restrictions; Requirements. If you will be subject to restrictions or supplemental requirements (e.g., you can’t operate a certain type of business within the premises or you are required to provide certain financial records), ensure such restrictions are reasonable/feasible, and consider making restrictions mutual, when appropriate.
Amenities and Services Provided by Landlord. Be sure any landlord obligation to provide critical amenities/services is detailed, such as parking, conference rooms, receptionist services, access periods, HVAC services, kitchen facilities, or janitorial services.
Insurance Requirements. Review any insurance requirements with your insurance provider.
Although an LOI will inevitably include language that benefits the landlord, there are provisions that can and should be negotiated by tenants. Enlisting the assistance of an attorney in negotiating the LOI can help level the playing field, because an attorney will be familiar with provisions that can be surprisingly costly to a tenant as well as language that landlords are more likely willing to modify. Also, it is more beneficial to have your attorney’s guidance before you sign an LOI — when you are still able to change detrimental language — rather than after you sign an LOI, at which point you likely are only able to minimize the impact of detrimental LOI language.
This update is for informational purposes only and does not provide legal advice. Every legal situation is different and must be independently analyzed by an attorney. Please consult with an attorney for specific guidance.
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