How Do You Wear Your LOI, Short or Long?

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What’s fashionable in your office, mid-thigh Letters of Intent, knee length or cover the ankles? Does it matter what kind of party the LOI going to?

“Short” has its benefits – “get the hook in – then, reel it in.” It might get away, but, at the end of the day, your creel will be full. [Yes – creel = bucket for captured fish.] But, do you sometimes lose the fish you really wanted? Do you and the fish get too exhausted watching your respective post-LOI negotiators fight over the “gaps”?

I don’t think there’s an answer other than, “it depends.” But, let’s not forget, an LOI doesn’t have to be either short or long; it can be crafted to meet the anticipated negotiation. For example, its exclusive use right may be important to a tenant, but the details of the default remedies may not be. So, it behooves the tenant to see that the LOI, negotiated between the real stakeholders, not their hired gladiators, spells out the protected items or services AND spells out the tenant’s remedies. To reprise an earlier, enthusiastically received Blog entry, if the landlord strongly wants its prospective tenant’s lease extension option conditioned on the absence of a tenant default at the time of exercise, make it part of the discussion. That means place it in the LOI. If a recapture right is important to a landlord, get it in the LOI. Don’t let it first show up in Section 1,235 of the proposed lease.

This isn’t to say that the LOI has to mimic the final lease or that the attorneys or others who draft a lease aren’t up to the task, but it seems that experience has proven that it almost always Gets the Deal Done faster and with less angst if the LOI covers what each party thinks is important.

There is a place for “intentional ambiguity” in drafting LOIs, leases, and other agreements. That’s a topic on a long list of (yet unwritten) blog entries.

In the meantime, what’s your opinion? experience? philosophy? Let’s Ruminate together (but not that together – I didn’t like the image). Post your comments here at www.retailrealestatelaw.com.

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Comments

  1. If you are a Tenant, go with the maxim that: “IF YOU DON’T ASK, YOU WON’T GET”

    See my Bio on GOOGLE.

    Harvey M. Haber, Q .C., J.D.

  2. Please use a term sheet, not an LOI. The litigators have enough business as it is.

  3. Graham Walker says:

    As always, it’s a case of knowing what kind of prospective tenant you are dealing with. I am a landlord so my experience as landlord and as counsel handling the deal is mostly from that side of the table.

    If it’s a mom and pop tenant, keep it relatively simple and focused on the essential and most important commercial terms. That’s what they’re looking for and you don’t want to scare them off with detail that could be left to the lease draft.

    On the other hand, if it’s a sophisticated national operator, you’d better make sure the LOI is sufficiently comprehensive. I learned that lesson the hard way in a deal with a national retailer who took a really strong view that if a commercial point wasn’t in the LOI (which took a long time to agree), then it couldn’t be in the lease either. In that situation it ultimately comes down to how strong a commercial imperative the tenant feels to get the space – operations people don’t enjoy it when the legal department is preventing operations from getting possession of a store that they are under pressure to have open within six weeks in order to achieve their sales or development targets.

    There is no “one size fits all”.

  4. I don’t think the LOI is ever the place to “real ’em in”. In my opinion, the LOI serves to memorialize the negotiations that occured between myself and the tenant or landlord. My opportunity to sell the deal is done verbally in person and by proposals via e-mail. The LOI is then just a chance to lay out the agreed-to basics on paper and get signitures to show intent to proceed to lease. The LOI shows commitment by both parties prior to spending resources on drafting lease documents. Most people do not like to sign anything, even if it’s non-binding so any surprises in an LOI are not going to be well recieved. That’s why it’s best to keep it short and simple. Signitures on the lease are all that really matter in the end.

  5. To balance the needs of operations people, real estate reps and protecting the company requires tight organization and cooperation because they are all wearing the same team jersey. I tend to favor trouser length LOI’s. I also tend to favor precision and specificity in them. The tricky part is what subjects to include. When representing tenants, some of the LOI’s I’ve seen – in addition to all of the financial terms – go into all of the components of additional rents and go so far as specifying the exact calculation of the proportionate share denominator , even to the extent of nailing down what space is included and what may be excluded. Subjects which are of design and operational significance should be addressed in the LOI. Some subjects which are of a legal nature but have significant business impact should be included, such as an affirmative statement that an SNDA in a form acceptable to the tenant is a condition of delivery of possession (if not the deal itself) and that subordination to future mortgages are conditioned upon an SNDA on terms acceptable to the tenant. Include kiosk protection and address landlord’s access rights as well. I lean toward the inclusion of basic assignment concepts by stating a basic principle of whether assignments can be made without landlord’s consent or if with (reasonable) consent, stating the principle that certain transactions will be permitted without landlord’s consent, to be refined by the attorneys during the lease negotiation process. I’m not sympathetic to the view of some real estate reps that long LOI’s are a waste of time as they are not read or understood by their counterparts when you move beyond pure dollars and cents. Whether the deal approvers for the other side read them or not, or even understand them, such an LOI is a powerful tool (i) when understood by the other side that it was relied upon when the deal was approved, and (ii)against wavering or outright reneging on the other side and forecloses mischief by the other side’s attorney on those issues, saving negotiation time down the road. Much more can be written on this subject and no doubt will be in subsequent comments.

  6. I usually advise my clients to completely avoid LOIs and “term sheets” if at all possible (I’ve found that it’s usually the brokers that are pushing for these anyway). I prefer to start circulating a draft lease with the key provisions (as communicated by the business people) included as soon as possible. If the business people absolutely insist, I try to make the Term Sheet (I also prefer to call them “term sheets” as opposed to “LOIs”) as brief as possible and include only the most critical business points. I have found that if you get too detailed in the Term Sheet, you run the risk of the other party objecting to a key provision that is later proposed for the lease (or that is part of your standard lease) because it wasn’t included in the Term Sheet. If you go the other way and try to cover all the bases in the Term Sheet – you might as well just negotiate the lease. I’ve also found that no matter how (or how many times) you say “non-binding”, “general terms”, “non-definitive” (or whatever similar terms you use) the other party is going to hold up the Term Sheet like it was a sworn affidavit signed in blood if you try to change any of the terms in the Term Sheet during final negotiations.

  7. Kathleen Howard says:

    As an acronym, “LOI” has become confusing – Is it a Letter of Intent? Or is it a Letter of Interest? How binding is it? Like others who have commented here, I prefer calling it a Term Sheet. For Mom and Pop tenants and/or landlords, be sure to get all the commercial (read $$) terms on the sheet. If you plan to use a “standard” lease form, call out the specific form and attach a blank copy/draft to the Term Sheet. This way, even a mini-skirt length Term Sheet will provide the coverage of long trousers.

  8. Michael Brennan says:

    I think LOI’s should be detailed enough to provide fundamental terms and deal breakers, but not so burdensome that lawyers need to thoroughly negotiate 2 documents. The LOI should be first gear, not a parking brake. In preparing or reviewing a first draft, I’d like to know if a radius or relocation clause has been agreed to, but the less time a client spends negotiating details of subordinating future interests, or calculating the measure of profits to be split on an assignment, the better.

    The experience and authority of the negotiating parties should also be factored in. Real estate managers of national retailers must comply with corporate policies, the specifics or negotiability of which they might not be completely familiar, and we’ve all ecountered brokers more interested in signing deals than reviewing them.

    Stick to the basics and the deal breakers, and begin lease negotiations from there. Leverage and the pressure or desire to complete the deal will take care of everything else. I suppose that means knee length.

  9. [from the landlord perspective]
    Not sure how the answer can be anything but “it depends.” For some tenants, once you agree on rent and term, send them a lease. On the other side, I find myself frustrated by language discussions that, in my mind, clearly belong in the final lease document negotiation (and I don’t want to engage my attorney yet). My preference is definitely for an as-short-as-possible LOI with my standard landlord form lease; we all know that’s not the reality I enjoy. If we’re making generalizations, I’d say that the longer the LOI, the more bargaining power the tenant has (at least as perceived by the tenant).

  10. Mike Rossi says:

    Since the goal SHOULD be for a Landlord and Tenant to feel comfortable and confident in their transaction, ie a win-win relationship (a Tenant wants to be successful and a Landlord wants rent), why isn’t there a standardized detailed lease document that cover’s every known (to date) term, condition, and situation/risk and not slanted one way or another? Strike the language that doesn’t apply and move on. The parties (either a mom and pop or institutional entity) can then easily address every issue that applies to the appropriate lease document/situation thereby limiting the contract time and all parties can sleep peacefully.

    Maybe my opinio

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