A letter of intent to lease is a summary of the terms acceptable to the landlord and the tenant who are looking to negotiate a lease of commercial space. It may be prepared by either party but often the tenant will write the letter after he investigates several options in the marketplace and has made the decision to focus on a single space. The LOI signals to the landlord that the tenant wants to move toward formal agreement. When signed by both parties, the landlord typically asks his attorney to convert the LOI into a comprehensive, binding lease document which effectively replaces the LOI.
Step One: Organize the Information
Gather all of the information that has already passed between the parties. For example, the landlord may have given the prospective tenant a proposal for the space, and supplied floor plans, pictures and even a sample lease document. The tenant may have gathered information about the building as well from a variety of sources, including brokers, online data sources and personal inspection. The more effort the tenant puts into creating an LOI that accurately reflects the details of the space and the business terms, the more quickly a mutual agreement will be reached. Also, a more accurate LOI usually translates to less time spent correcting errors and misunderstandings when the final lease is being prepared, which is almost always conducted by hourly paid attorneys.
Step Two: Gather the Issues to Address
List all of the issues that will be addressed in the LOI. Typical issues that require clarification in the LOI include:
– the space being leased, which may include internal and external areas like sidewalks or loading docks and parking rights
Term of the lease Base rent
Escalations in rent over the term of the proposed lease, called rent review
Responsibility for operating expenses such as utilities, real estate taxes and casualty insurance
Renovations – who will pay for making the space usable for the tenant's purpose, plus a timeline
Allowed uses of the space.
Many tenants have specialized concerns like signage, hours of operation, security and restricted access. All of these issues should be identified and sufficiently explained by the tenant in the LOI.
Step Three: Create a Template to Prepare a Final Draft
Consider using a template to prepare the final draft of the LOI. The broker or leasing agent who is helping you may have a template form of letter, or you may be able to find one online. The landlord can also be a resource in this step, too, by offering a boilerplate version of the lease. Knowing the lease will eventually contain all of the agreed points, the tenant can use the table of contents of the lease as a starting point for the LOI. Some experienced tenants, like a national chain restaurant, will have a very detailed document they have honed over years of use.
Step Four: Write a Simple Letter of Intent to Lease
Carefully define your proposal related to each issue. As an example, under the heading Lease Term, the tenant might indicate he wants to “lease the premises for a continuous period of 60 months, beginning on June 1, 2015, and ending on May 31, 2020.” Using specific language enables all readers of the document to understand and interpret the offer being made by the tenant. Occasionally, the LOI will refer to a detailed exhibit that appears at the end of the letter; a floor plan or a year-by-year rental schedule.
Step Five: Create a Conclusion
Conclude with a short paragraph that explains the terms expressed reflect intent but are not binding on the parties. This point is key – what you're doing here is getting engaged, not getting married. If you don't like something that's written into the lease document, or the landlord won't accept your terms, you can always back out of the deal.
The closing paragraph may also express a time limit for an agreement requiring the landlord to make some form of response by a certain date. The response might take the form of a signed copy of the letter, or just a phone call to discuss the issues. Finally, be sure to sign the letter of intent to rent or lease a space and add your name and title. Provide a signature line for the landlord so he can accept your offer.
H. Blaine Strickland has worked in real estate for more than 30 years. He serves as an adjunct professor of business at the University of Florida and the University of North Carolina. Strickland earned a Master of Arts in real estate and urban economics from the University of Florida. He also holds designation as a certified commercial investment member (CCIM).