Can a Detailed Letter of Intent Speed Up a Transaction?

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Three weeks ago, Ruminations posted a piece titled: Why Does It Take So Long To Get A Deal Done? You can see it here. Thus far, between direct comments to the posting itself and comments made to various LinkedIn Groups, it has garnered 61 comments, a new record for us. Obviously, it hit home for a lot of us.

There were many points of view expressed. Some pointed fingers at one class of player or another, remarkably, however, in respectful and helpful ways. Others bemoaned the general “turmoil” in the economy. The single most common thought, call it the largest minority’s point of view, suggested that a more complete letter of intent at the outset could trim the time it took to get a deal done. Our September 21, 2011 posting: How Do You Wear Your LOI, Short or Long? raised a closely related issue and some readers might want to revisit it. To do so easily, click here.

Those endorsing use of a more comprehensive Letter of Intent suggested that the business people were in a better position to quickly reach agreement on the covered issues than were the attorneys or others charged with getting the documentation completed. To that end, here is a proposed checklist for a LOI covering a lease. If this is well received, we may offer one for a property purchase in a later posting. The following checklist is available from Meislik & Meislik in the form of a laminated desk card, but quantities are very limited. So, if you would like a copy (on a first come, first served basis), send a request to imeislik@meislik.com.

 

ITEMS TO INCLUDE IN A LETTER OF INTENT FOR A LEASE

1.   Parties: Identify names and addresses of parties (LL, T, and any guarantor[s]).

2.   Accurate identification of: (a) the land, if a ground lease; (b) if not a ground lease, the building within which the T will lease space (including, preferably, a street address): Include the street address, municipality, and state, and, if known, the tax block and lot numbers.

3.   Accurate identification of the Leased Premises: Include the location, dimensions, square footage, and, if applicable, the name of the former tenant. 

4.   Rent: Fixed monthly rent, percentage rent [if applicable], etc.

5.   Additional Rent: Clarify if T will be paying a proportionate share or direct pay for additional rent charges (or, if both, separate them out). State the proportionate share, if known (or, if Additional Rent is to be paid pursuant to another formula, provide a brief description of the formula).

6.   Term: How many years is the initial term of the Lease?

7.   Renewal option(s): How many options, how long is each option, rent during renewals, required notice period prior to T’s exercise of the renewal option(s), etc.

8.   Term Commencement Date: If not a fixed date, describe how it will be determined.

9.   Rent Commencement Date: If not a fixed date, describe how it will be determined.

10.   Security Deposit: How much? Does it change as the rent amount changes?

11.   Tenant Improvement Allowance: How much? When and how is it paid to T?

12.   Permitted Use: Be as broad or specific as possible, depending on whether you are the LL or T.

13.   Exclusive Use Rights: Be as broad or specific as possible, depending on whether you are the LL or T. If you are the T, include the nature and extent of the exclusive and any carve-outs, as well as remedies for LL’s breach.

14.   Parking: How many spots? Are they reserved? Where can T and its customers, employees, etc., park? Exclusive rights? Reserved spots?

15.   Signage: Where can T hang its signs and at whose expense? Pylons? Monuments? Directories?

16.   Tenant Alterations: What kind of alterations will T be permitted to make? What LL’s consent, if any, is needed?

17.   Assignment and Subletting: Is it permitted? To what extent? Consent(s) needed? Carveouts to any consent requirements? Restrictions on transferee? Is T released from liability? Does the LL get any proceeds? Does LL have any recapture rights?

18.   Site Plan: Attach drawing of leased premises and of the entire property, and identify certain critical features (signage, parking, ingress and egress, etc.).

19.   Operating Expenses: How and when to be paid? Full percentage or escalation basis (if latter, provide base year). Audit rights?

20.  Landlord Services / Maintenance: What services will LL provide, and at whose expense? Who maintains, repairs, and/or replaces what?, and at whose expense?

21.   Utilities: Is space to be submetered? If not, what is T’s share?

22.   Environmental: Who is responsible for any necessary environmental cleanup, and at whose expense?

23.   Insurance: Which party is required to obtain what insurance? How and when does T reimburse LL for LL’s insurance?

24.   SNDA: Is LL required to have its lender deliver an SNDA to the T? If so, when?

25.   Right of First Refusal: Does T have any first rights to lease? Buy? For parking spots?

26.   Due Diligence Period: How long? Right to terminate if T is unhappy with results of its due diligence?

27.   Broker(s): Names and addresses, as well as which party is paying the brokerage fee(s).

28.   Exclusivity: Negotiations between LL and T will be exclusive for X days after execution of LOI.

29.   Nonbinding: LOI is not a binding document.

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Comments

  1. You bet! The more detailed the LOI is, the less room the attorney on the other side (when it gets to him/her) to create mischief.

    On #3, I would also specify who the adjacent neighbors will be, if that was part in the initial decision as to location and approval of the deal (recognizing that those adjacent tenants may come and go over the term, so long as the opening/operating cotenany requirement is not otherwise violated). No Build zone or no-kiosk zone – should be identified on plan. Penalties for violation.

    #5 – Additional Rent – specify that tenant will only pay ad valorem takes and the garden variety of special assessments, but excluding assessments made to fund on-site improvements. Identify any exclusions from the denominator.

    #11 – TI Allowance. Specify that a good portion is to be deposited upon delivery of possession, to reduce risk of default. Limit the required documents to the absolute minimum, e.g. COO and a lien waiver from the general contractor only, not the subs. Provide for rent offset if not paid when due.

    #17 – Assignment – You’ll need your attorney at your elbow to help you with this one.

    #19 – Operating Expenses. If a prorata share concept is employed, try to restrict to repair and maintenance and avoid development costs (but without getting bogged down in the nitty gritty negotiation of the clause).

    #23A (new). Who restores (and who pays for) what during restoration.

    #24 – SNDA – Absolutely – it should be a delivery of possession (or rent commencement) condition.

    All of this may force the deal makers to work harder, but it will save a lot of time in completing the deal by reducing the negotiation dance between the attorneys.

  2. In my experience, no question that a detailed letter of intent (LOI) goes a long way toward streamlining the negotiation of the actual lease – unless you have to deal w/an errant party that does not abide by the LOI terms in their drafting of the lease (just had this experience w/a recalcitrant LL). A lot of brokers I’ve dealt with are happy to have their client’s attorney look over the LOI before signing – that’s smart. Other brokers seem to steer their clients away from having an attorney review – arguing that it saves their client legal fees. I couldn’t disagree more – a well drafted, but perhaps not overdone, LOI will yield benefits in getting the deal done more expediently on agreed terms.

  3. Steve Noll says:

    I usually limit the LOI to items 1 -15 and leave the rest to be negotiated in the Lease unless there is something there that is criticial to the specific business deal. I also include Landlord’s work either in a paragraph or as a seperate Exhibit. I try to avoid allowing either party to overthink the deal and just get both sides to commit to working with each other.

  4. Jim Henegan says:

    My preference is to have a detailed letter of intent, although if your business people do a bad job on the letter of intent, it makes the attorney’s job much more difficult. I know one retailer that was using a very detailed LOI, but the landlords were taking the pro-tenant provisions and making them pro-landlord and the business people were not able to negotiate the changes. They have switched to a very short LOI.

    The key is to actually have a meeting of the minds on the main business points. If you do, then documenting the deal is fairly easy.

    If one side signs a non-binding LOI not understanding what is in it, it makes the negotiation harder. The side that “won” the LOI keeps saying “But it is in the LOI” and the other side says “I don’t care, we are not (maybe can not) agree to that.

  5. Alan Betus says:

    My thoughts:

    *I think a longer, more involved LOI works best when the LL and Tenant are two parties of equal strength, such as a national or regional LL and a chain store retail tenant. A detailed LOI is probably overkill when dealing with a local mom and pop tenant, and may even be an impediment to getting the deal done.

    * I may be in the minority, but I think radius restriction and relocation should be addressed in the LOI

    * LL Work / condition of premises should be addressed in the LOI, preferably, making sure that LL and Tenant construction people have reviewed and/or provided input.

    * Also, any contingencies, such as permitting or zoning, should be addressed in the LOI.

    * If more of the lease negotiation takes place up front, so to speak, I would involve the attorneys before the LOI is signed so that everyone is on the same page throughout the process. This also insures that the deal makers aren’t accidentally circumventing any company policies, putting the company at risk by agreeing to something that they aren’t fully authorized to agree to, or trying to negotiate an esoteric concept that they don’t fully grasp.

  6. Jason Mahoney says:

    Maybe I missed it but the one item that absolutely should be addressed in a Letter of Intent is the operating covenant. Whenever the LOI is silent as to that issue, landlords argue that one is implied and tenants argue that it isn’t required – I cannot even begin to tell you the number of deals I’ve worked on over the years that were either delayed or axed because of issues relating to an operating covenant…

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