November 30, 2016
By LaVonne Torrence Berner
Far too often clients come to me wanting to drastically change terms they agreed to in the letter of intent. In most instances, they were informed that they can change later, because the letter of intent is non-binding. Not only is this not always accurate, revisiting settled terms (or re-trading as it is called in the industry) slows down and sometimes kills all prospects of reaching a final lease.
The following discussion is of the nature of the letter of intent and how the terms of the LOI can make or break a transaction.
What is the Letter of Intent?
In lease transactions, the letter of intent sets forth the terms that each party “must have” as a condition to entering into a lease. Such terms vary from transaction to transaction, depending on the bargaining strength and needs of the parties but invariably include critical items such as rent, lease term, deposit requirements, guaranty obligations, proposed use, and use restrictions.
Since reviewing and entering into a letter of intent requires the parties to begin expending time and resources, it is often viewed as a sign that each party is serious about moving forward with a lease. On the contrary, the letter of intent can also save time and money by allowing the parties to discover early that the transaction is not a good fit.
Is the Letter of Intent Binding?
The short answer is that “it depends.” The laws on this issue vary from state to state. But, typically, the letter of intent can be binding if the parties intend it to be. Since a binding letter of intent can, in effect, be considered a lease, most parties do not want the letter of intent to be binding.
To be non-binding, a signed letter of intent must clearly state the parties’ intent to not be bound both with respect to the stated terms and any implied obligation to begin or continue lease negotiations in good faith. The law on this issue varies from state to state so careful and skilled drafting is required.
Non-Binding, but Nevertheless “A Big Deal”
When parties are not on the same page on major issues at the letter of intent stage, in many instances it does not make good business sense to move forward with lease negotiation incurring costs for attorneys, architects, permits, etc, only to find out thousands of dollars and many, many hours/days/months later that there is no deal.
So…what is the big deal? In an industry where time, money, and relationships are everything, developing a reputation as a time and money waster has a price. Signing a letter of intent without intent to follow through or with extensive re-trading wreaks of bad faith and nevertheless results in loss of good will, bargaining power, and potentially all ability to get a call-back from players in the industry. For landlords, the quality of tenants that are attracted to spaces is diminished. For tenants, the number and caliber of landlords who are willing to entertain leasing to the business are diminished. The adverse impacts are endless.
So, before treating the non-binding nature of a letter of intent as a license to address major issues in the lease, think about the long term impact of failing to seriously address deal-breakers at this critical stage. The life and needs of your business may depend on it.
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