Learning About Leases: Letter of Intent
The first step of any commercial lease, whether as Tenant or as Landlord, is to set down the basic terms of how you want the lease to work. This is typically done with a Letter of Intent (LOI). The LOI is created based on the initial negotiations between the business representatives of the landlord and the tenant.
Depending on the language, they can be binding contracts, or non-binding frameworks. In general, a tenant prefers a non-binding framework so that additional negotiation can occur if they find problems with the space, and the landlord would prefer it to be binding to lock the tenant into the space. The LOI will often state this explicitly.
In putting the LOI together, or reviewing it, it is important to have the following terms defined:
Identification of the parties: Who is entering into the agreement?
Description of the Premises: This is often a written description of the space with a diagram attached giving general information.
Use: The Basic purpose that the tenant will use the space for.
Rent: Sometimes fixed for a term, but more likely will increase based on an agreed upon formula.
Operating Expenses: Sometimes handled with exclusions or even caps on the Tenant’s liabilities for increases in Operating Expenses. THIS IS AN ASPECT BEST ADRESSED AND RESOLVED EARLY ON.
Possession date: When the buyer moves in.
Term of lease: The length of the lease, including any option to renew.
Assignment and subleasing rights: Whether someone other than the Tenant is allowed to rent there without the permission of the landlord.
Security deposit: The amount to be retained by the landlord to cover potential damage to the property.
Landlord’s work letter: How will the landlord improve the space before the renter occupies it?
Non-disturbance clause: Agreement that the tenant will not bother other tenants.
Tenant improvements: Requirements that Landlord spend money. This MUST be addressed in the LOI. Landlord will provide Tenant with an allowance for improving the Premises pre possession, and the LOI will reflect this amount.
Landlord buildouts: Improvements or additions to be constructed by the landlord as a condition of the agreement.
Remedies for default: waiver of jury trial; mandatory arbitration, etc.
These are non-exhaustive, but are the main terms that should be included before entering into any lease agreement.
By: Nicholas P. Weiss, Esq
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