Letter of Intent is First Tool for Tenant in Lease Negotiations
More often than not, a tenant will accept a landlord’s letter of intent to lease space if the letter sets forth the basic business terms (e.g., rent, term, deposit, etc.) and nothing more. However, this is a missed opportunity for the tenant. For most commercial tenants, they will have the greatest leverage in negotiating lease terms with the landlord at the very beginning of the process when they have not fully committed to the space and the landlord is trying to lease it. The tenant should look at the letter of intent not only as a document to set forth basic business terms, but as the starting place to include particular terms that are unique or important to the tenant.
The letter of intent is an efficient and economical way to determine early on in the process if the landlord’s requirements and the tenant’s needs can co-exist. The letter of intent most likely will be non-binding, but there is an element of good faith that the parties will include its terms in the lease.
Besides the basic business terms, following are some suggested items the tenant should consider negotiating in the letter of intent:
- Rent Abatement: How much rent is abated and for how long?
- Tenant Improvement Allowance: How much is the allowance and when is it disbursed to the tenant? Is it reimbursed after the tenant pays the costs or is it disbursed on receipt of invoices for work completed?
- Notice and Cure Rights: What are the rights in the event of monetary and non-monetary defaults under the lease?
- Right to Expand: Does the tenant have a right of first refusal to expand into contiguous space if it grows?
- Options to Renew: How long is the renewal period? How many options to renew will there be? How will the rent be calculated during the renewal periods?
- Assignment Rights: What are the parameters for the landlord’s approval of an assignment or sublease? Can the tenant assign the lease to an affiliated entity or to an entity that purchases all of tenant’s assets without requiring landlord’s approval?
- Parking Rights: If the tenant requires reserved or unreserved parking spaces, how many are there and where are they located?
- Hours of Operation for the Tenant’s Business: If Saturday hours are important for an office tenant, does the landlord agree to give the tenant access to the building and supply the HVAC?
- Waiver of Landlord’s Lien: If the tenant uses credit financing to purchase its equipment or inventory, will the landlord waive its lien on the tenant’s personal property?
- Signage Rights: What are the tenant’s rights to put a sign on the building or any monument sign?
- Mutual Releases Regarding Insured Losses: Will the landlord release the tenant for insured losses? (For example, does the landlord release the tenant from paying to rebuild the building if an employee leaves the coffee pot on?)
This list is by no means exhaustive. Prior to signing the letter of intent, the tenant should examine how it will use the leased space and how it foresees the future of its business at the space. The letter of intent should address any particular needs important to the tenant. It is the tenant’s best shot to obtain what it needs in the lease.
Ann Marie Mehlert is a real estate attorney at Lerch, Early & Brewer in Bethesda, Maryland who works with real estate developers, investors and owners on all aspects of commercial real estate. For more information about lease negotiations, contact Ann Marie at (301) 907-2803 or firstname.lastname@example.org.