Real Estate

Are You Bound by the Terms of a Real Property Letter of Intent?

Complex commercial real estate transactions typically involve a back-and-forth negotiation of numerous terms of the agreement, a process which does not occur overnight. Accordingly, parties to a real estate purchase or lease transaction generally first execute a letter of intent (LOI), which documents the parties’ intent to proceed with the negotiation of a full contract. The LOI includes the essential terms of the agreement, such as closing date and purchase price, or lease term and rate. However, detailed terms and conditions are reserved for the final, formal lease agreement or purchase contract.

The LOI, with its brief description of only the most basic, essential terms, is not intended to be a binding contract.  However, if it is not properly drafted, the parties could find themselves locked into a binding LOI. For example, the existence of elements required in an enforceable contract, such as property description, price, closing date and payment terms, without expressly declaring parties’ intent that it be non-binding, could constitute it as a valid contract.

While parties who enter into an LOI generally intend to consummate the transaction, if the LOI is deemed enforceable as a stand-alone contract, both parties may be subject to undesirable consequences. For example, the LOI lacks essential contract terms such as indemnity clauses, warranties, financing arrangements, or any other detailed terms necessary to protect one or both parties. To ensure the LOI serves its intended purpose, it must contain a specific provision that states the LOI is intended to be non-binding until such time a final agreement is executed by the parties.

What if you want parts of the LOI to be binding, regardless of whether the deal is finalized? Perhaps buyers and tenants want an enforceable provision stating that the seller or landlord will not offer to sell or lease the property to others while the parties are in negotiations. A hybrid LOI can be drafted to ensure the negotiations and final terms are kept confidential until a final agreement is executed. Just as with the provisions stating the LOI is intended to be non-binding, the provisions that are intended to be binding must be carefully drafted to ensure they are enforceable and do not pose unintended consequences for other provisions within the document. A hybrid letter of intent can be a very effective tool in facilitating the purchase or lease of commercial real estate, but care must be taken to ensure it is drafted so that it serves its intended purpose.  

Top 3 Real Estate Tips for Small Businesses

For the vast majority of small businesses, the company’s first and only real estate transaction is entering into a lease for commercial space. Whether you are considering office, manufacturing or retail space, the following three tips will help you navigate the negotiation process so you can avoid any unpleasant surprises or costly mistakes.

“Base Rent” is Not the Only Rent You Will Pay
Most prospective tenants focus their negotiation efforts on the “base rent,” the fixed monthly amount you will pay under the lease agreement. You may have negotiated a terrific deal on the base rent, but the transaction may not be the best value once other charges are factored in. For example, the majority of commercial lease agreements are “triple net,” meaning that the tenant also must pay for insurance, taxes and other operating expenses. When negotiating “triple net,” ensure you aren’t being charged for expenses that do not benefit your space, and that you are paying an amount that is in proportion to the space you utilize in the building. Another provision to watch for is “percentage rent,” in which a tenant pays a percentage of revenue in excess of a specific amount. This may not be a bad thing, as it provides the landlord with an incentive to help ensure your company is successful.

There’s No Such Thing as a “Form Lease”
Most commercial property owners and managers offer prospective tenants a pre-printed lease containing your name and various terms. They often present these documents and adamantly explain that it is the landlord’s “typical form lease.” This, however, does not mean you cannot negotiate. Review every provision in the agreement, bearing in mind that all terms are open for discussion and negotiation. Pay particular attention to the specific needs of your business that are not addressed in the “form lease.”

Note the Notice Requirements
Your lease agreement may contain many provisions that require you to send notification to the landlord under various circumstances. For example, if you wish to renew or terminate your lease at the end of the term, you will likely owe a notice to the landlord to that effect, and it may be due much earlier than you think – sometimes up to a year or more. Prepare a summary of the key notice requirements contained in your lease agreement, along with the due dates, and add key dates to your calendar to ensure you comply with all notice requirements and do not forfeit any rights under your lease agreement.