In general, an LOI is a document commonly used when negotiating a commercial lease. LOI’s break down the material terms and conditions of a proposed deal. An LOI provides a starting point for lease negotiations and serves as a guide for the landlord’s attorney, who typically drafts a commercial lease. That said, an LOI is not comprehensive and many times does not reflect every term that will be negotiated in the final lease. However, an LOI serves an important purpose; it creates an outline of the deal and provides a road map for the parties involved. An LOI generally includes terms, information and conditions relating to the identity of the parties, a description of the premises, lease term, rent and tax escalation costs, security deposit, permitted use, build-out free rent period, and assignment provisions. An LOI should also include any option(s) to extend and/or right of first refusal offer.
A commercial LOI helps clarify the terms of the deal and determines early in the process whether there are any absolute deal breakers. Since the Landlord’s attorney is the one drafting the lease, it is prudent for the tenant to include specifics, rather than reserving until such time as the lease has been circulated. A prospective tenant would be wise to retain counsel prior to negotiating any letter of intent to ensure that its specific parameters are addressed.
Enforcement of an LOI is case-specific. There are a limited number of matters where the parties are bound by the entire LOI, while in other cases LOI’s have been deemed to be non-binding. Courts analyze certain provisions and find LOI’s binding, while holding that other clauses are inconclusive. Generally speaking, Courts look at specific language as to whether the parties intended the LOI to be binding or what a reasonable person would have intended and believed. This decision can be based not only on the language in the LOI itself, but on the parties’ subsequent reliance on it. The law does not always provide certainty, however, well drafted LOI’s include an explicit disclaimer stating that unless expressly set forth therein, the term sheet is not binding until the delivers a fully executed lease to the tenant.
In certain instances, there are some provisions of the LOI that a party will want to be binding. For example, a moratorium on listing the premises or a representation that the parties will engage in good faith negotiations may be non-binding. A common example of an LOI provision that is generally binding is a confidentiality provision. This provision provides that in the event the deal falls through, the proposed rent and tenant’s financials will be kept confidential.
From a practical perspective, an LOI is a good tool for streamlining lease negotiations. It is advisable to retain experienced counsel, such as Mava Law PLLC, to draft and negotiate the LOI. Without the advice of counsel, a client may become locked in to terms without fully understanding the long-term ramifications.