Final Assessment: Letters of Intent (Parts 1-4)

In most cases, the tenant has more leverage in the lease negotiating process after the letter of intent is fully negotiated.

A lease becomes effective once the LOI terms have been agreed to.

One of a landlord’s primary goals is to avoid vacancy of its space.

One of the reasons a tenant loses a significant portion of its negotiating leverage following the LOI stage is because it has gotten a bit “financially pregnant” by hiring its leasing attorney, architect and other third party professionals.

The LOI is a legally-binding document.

The LOI sets the playing field on which the parties will be negotiating the lease.

Most initial lease drafts are arguably among the more one-sided, offensive legal documents known to mankind.

Although a commercial lease is a legal document, most of the language within a lease is of a “business nature.”

Generally, LOI’s are negotiated between attorneys and owners.

When advocating for a tenant, you would prefer to keep the LOI and whatever definitions found within it as narrow as possible.

When advocating for a landlord, leasing professionals should be as detailed yet as broad as possible wherever possible when it comes to preparing and/or negotiating the LOI provisions.

When advocating for a tenant, leasing professionals should be as detailed, yet as broad as possible when preparing and/or negotiating LOI provisions.

Although there is no hard and fast rule as to how large or small the LOI should be, as a general statement, the preferred length of a tenant’s LOI is around one (1) page.

As a tenant advocate, it is imperative to create exit strategies from the lease for clients in the initial draft of the letter of intent.

A tenant should not agree to language within a LOI stating that the premises may be used for any lawful use.

Given that landlords should want the use clause to be as narrow as possible, for a tenant that is going to use the space as a nail salon, the landlord’s draft of the letter of intent should state that the premises may be used as a nail salon and for no other purpose.

As a tenant advocate, where the lease commencement date is tied to landlord’s substantial completion of landlord’s work, at a bare minimum within the letter of intent, the “substantial completion” definition should provide that it shall be deemed to have occurred when landlord’s work has been completed except for minor items which (1) shall not cause interference with tenant’s business operations or the use of the premises and (2) can be completed or remedied by the landlord’s contractor within a reasonable period of time thereafter not to exceed thirty (30) days.

Where the lease commencement date is tied to landlord’s substantial completion of landlord’s work, tenant advocates should insert the definition of substantial completion in their LOI.

If the landlord is performing work to prepare a tenant’s space, from a tenant’s perspective, it is not necessary for the definition of “substantial completion” to be included in the letter of intent.

A property’s lack of a certificate of occupancy that conforms with a tenant’s intended use is not a substantial risk for tenant.

Tenants should negotiate for “outside date” language by which the landlord must substantially complete landlord’s work by an agreed upon date (the “outside date”), and if landlord fails to do so, tenant will receive a day of free rent for each day of delay in landlord delivering the space beyond the “outside date.”

If deleting “outside date” language from a LOI and lease is not an option for a landlord, landlords should make sure that before “outside date” penalties can arise, such penalties are subject to force majeure and tenant delays.

If the lease commencement date is tied into the date landlord’s work is substantially completed, landlords should attempt to have the lease commencement begin on whatever day the premises are actually substantially completed (as opposed to 3-5 days after giving tenant notice of substantial completion).

If the premises are being delivered to a tenant in “as-is” condition, landlord advocates should attempt to have the lease commencement date be the date that a fully executed lease is delivered to tenant or its attorney.