Letter of Intent: The Precursor to the Lease
In the context of commercial leasing, a Letter of Intent (“LOI”) is the resulting document from a period of negotiations between a Landlord and Tenant. The LOI sets out the basic terms which must be transposed into a binding lease agreement.
These initial agreements are useful to both the Landlord and Tenant by memorializing the terms of the basic deal in writing, which can be binding or non-binding. Theses precursory agreements must be carefully drafted so as not to serve the wrong purpose. Courts have occasionally found the terms of an LOI to be binding on the parties where the intent was not specified. As a result, careful drafting is required to ensure that the LOI terms are not binding but rather just an agreement to agree.
An experienced real estate attorney can be of vital importance in both negotiating preliminary terms and carefully drafting the lease to memorialize the mutual interests of the parties involved.
Negotiating the initial terms is an important first step to determining whether you need an attorney.
Premises | The Premises references the specific boundaries and physical extent of the property that the Landlord is leasing to the Tenant. An adequate description of the leased property is necessary for the lease to be enforceable.
Term | The “term” is the duration of the Tenant’s possessory rights to the property. During the Term of the lease, the Tenant, not the Landlord, has the right to exclusive possession of the property, and therefore it is important to establish when the Term commences and when it ends. In most commercial leases, the Term does not commence until either (1) the Tenant has actually gone into possession of the space; or (2) improvements that Landlord agreed to make or permitted to be made to the Premises prior to Tenant’s possession are “substantially complete.”
Rent | This is the economic value that Tenant must pay to Landlord as consideration for the right to use and occupy the Premises. The lease drafter must clearly specify the rental rate for the Tenant. If the rental rate is too vague, the lease could be deemed unenforceable. If the parties agree to an abatement of rent during the initial months of Tenancy, the Rent Commencement Date should be clearly indicated in this provision.
Use | This typically refers to Tenant’s general type of business and purposes for occupying the space. This provision of a lease must be drafted to permit the Tenant to use the Premises for the current intended business purpose and any prospective future uses the Tenant may deem appropriate.
Quality of Premises | The Tenant expects the Premises to meet its needs and to continue to serve its purposes throughout the Term. Some commercial leases contain specific provisions addressing the required quality of the Premises. The Landlord’s obligations to provide a space of a certain quality may be distributed among several provisions within the lease.
Leases are not “one size fits all” and each lease requires the specific attention to detail and careful drafting skills of an attorney.
Transfers in Interest | Every commercial lease should address whether, and to what extent, the Tenant may transfer its rights in the Premises to some third party. The two different ways in which a Tenant can transfer their rights in the Premises are known as Assignment or Sublease. An assignment occurs when the Tenant gives up all of their rights and responsibilities to the rental agreement and the Premises to the third party. Typically, the Tenant will remain responsible for the terms of the lease such as expenses or damage caused by the third party. A sublease is when the Tenant gives the third party the right to occupy a portion of the Premises or the whole Premises for a specific period of time. Normally, commercial leases restrict the options of sublease or assignment and most leases require the Landlord’s prior approval.
Maintenance and Repairs | A typical commercial lease places most or all of the responsibility for repairs and maintenance on the Tenant, except that the Tenant’s obligations may be limited with respect to reasonable wear and tear, and Landlord may be responsible for structural repairs. A well drafted lease will outline standards to which the premises will be maintained, often referencing industry standards. It is best to clearly define the obligations of maintenance and repairs of the parties to reduce uncertainty.
Rules and Regulations | The Rules and Regulations provisions of a lease are of particular importance to the day-to-day business operations of the commercial Tenant. The Landlord creates rules and regulations to govern the behavior of all tenants in the Premises (i.e. shopping center). A commercial Tenant should not expect the Landlord to oversee their operations, but instead should expect that its use, and the uses of other tenants, will be regulated for the benefit of all occupants leasing property from the Landlord.
Alterations | Most Tenant’s use their Premises with minimal need for changes until the Term of the lease expires. However, a Tenant may need to physically modify the Premises during the term of the lease. As such, this lease provision should be carefully negotiated and scrutinized. The Landlord should be wary that the Tenant may, in the course of making alterations, make permanent changes to the Premises, or in some way affect the mechanical, water, electrical, or underlying structural systems of the building.
Building Services | This lease provision implicates a variety of fairly mundane but essential elements of the Tenant’s and the Landlord’s daily relationship. Tenant will have a greater awareness of Tenant’s needs in the way of services than Landlord. Landlord will likely not have an in-depth knowledge of Tenant’s specialized needs for the Premises, such as enhanced telephone service, fiber optic hookups, special bathroom facilities, etc. Thus, the Building Services provision should be strongly negotiated by the parties prior to finalizing the lease.
Fire or Casualty | This provision of the lease determines whether the Tenant or Landlord will be responsible for damages to or destruction of the Premises, the building, or the entire complex. This provision should make distinctions between the amount of damage or destruction (from minor damage to total destruction) and whether a party is obligated to “restore” the Premises or to simply “repair” the Premises. All these considerations should be discussed and negotiated prior to finalizing a lease.
Insurance | In conjunction with the Fire and Casualty provision, the parties must determine whether one or both parties are required to carry hazard insurance. The parties carry insurance policies to permit the transfer of risk, to reflect the contractual liability created by the lease agreement, and to reflect default rules of law where the lease is silent as to risk. Landlord and Tenant will carry specific insurance policies to cover the liabilities to which they are subjected to by the lease.