What to Know Before Signing a Letter of Intent for a Lease

You’ve spent hours upon hours researching property listings. You’ve spent untold weekends looking at spaces. Finally, you’ve found the perfect place to rent for your business. Congratulations! At this point, you may be tempted to dive right in. But before you take the first official step toward setting up shop — signing a letter of intent (LOI) with your new landlord – there are a few important things to consider.

A letter of intent is a precursor to a fully negotiated lease, and lays out the parties general expectations about the terms of the lease. It is, in short, an agreement to make an agreement.  The law continues to be unclear whether the LOI is binding, but parties that do not take them seriously are making a big mistake. Because there is this legal uncertainty, there is a chance that the LOI will be determined enforceable.

Therefore, be careful what you agree to!  Even the strongest positioned or leveraged parties have trouble renegotiating terms of a lease once agreed upon in the LOI.

Hopefully, you have a broker working with you to look out for you, but even when you do, make sure there is not a dual representation of the lessee and the lessor, or landlord. If there is dual representation, keep it in mind as you move through the stages and remember that the broker is representing both parties. This can create a conflict at times, and the lessee should keep in mind that the lessor is likely a repeat client of the broker. For that reason, the broker — consciously or not — may be inclined to represent the lessor’s rights more vigorously than the lessee’s.

Items to consider as you enter into a letter of intent:

1. What type of lease are you entering into: gross, triple net, or modified? There are advantages and disadvantages of each one depending on the type of space, the landlord, tenant’s resources, and the proposed use.  Know what each of these means (or work with someone who does) and be sure those provisions are properly stated in the lease agreement.
2. If the rental rate is defined as price per square foot, provide for a provision to re-measure the square footage upon possession, and to revisit the rental rate if there is a significant error.
3. In what state will you receive the space, and in what state is it currently? If the space is raw, have an understanding as to who will provide base mechanicals. If you will receive the space in a “white box,” be sure to understand both parties have the same definition of the term.  If the space is going to be built out, include details as to who will be responsible for paying for it, i.e. will landlord provide tenant an allowance from landlord, who is responsible for the overages, etc.
4. What does the build out allowance include and when does it begin?  Identify whether construction drawings, base mechanicals, and white box are part of the allowance.  These details should be discussed early on with full understanding of their impact.
5. Does the tenant pay its own utilities or a portion of water, electrical, etc.? If tenant pays utilities, inquire as to whether they will be separately metered.
6. What is the parking allotment? Determine if parking is included. If it is not, inquire in advance as to the cost and how to increase the allotment in the future.  This can be a significant factor in taking on space for some businesses.
7. Will there be an option to renew? If so, determine the rate and how length of the term.
8. Will there be an option on adjacent space? If your business is in a growth stage, this could be important especially if the lease is long term.
9. Is there an exclusivity provision? If you have a competitive retail business, and the space is in a suburban strip mall, or the landlord owns numerous properties in the vicinity – this may be an important provision to include.

These are just some of the issues that may arise in the letter of intent stage of a lease negotiation, and of which the tenant should be aware. If they are addressed and agreed upon at this stage, keep in mind that it will be difficult to renegotiate these terms later. It is important to work with someone who is working for you, and can preserve your rights on these issues. If you have questions about a lease letter of intent or about lease negotiation for your business in general, please contact me.

You may also be interested in our video on the importance of the lease letter of intent in lease negotiations.

For blogs, videos and additional information to help your business thrive in Detroit or elsewhere in Michigan, visit the Dalton & Tomich, PLC business resources page.