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Letters of Intent (LOI):  Five Common Surprises to Avoid for Retailers and other Tenants

December 27, 2012

 

By:  LaVonne Torrence Berner

 

Entering into a retail lease is one of the biggest financial commitments undertaken by independent retailers and franchisees.  The letter of intent is the starting point for this commitment and sets the trajectory for the entire lease term.  While nothing takes the place of engaging an attorney experienced in retail lease drafting and negotiation, knowing the following five basics before accepting a letter of intent can help avoid detrimental surprises at the lease stage of negotiations.

 

1.         A lease term renewal option that does not set the rent for the renewal term is really no option at all. 

 

The crux of a renewal option is certainty of the ability to stay in the space at a known rental rate.    Unless the rent and renewal term are negotiated as part of the initial lease, the renewal option serves no purpose.  Yes, there is always a chance that the agreed upon rental rate will be higher than market rent.  However, if this occurs, a tenant will have leverage to negotiate a lower rate if the need arises.  The tenant’s chance of finding a cheaper space will be greater than the landlord’s chance of finding a tenant who will pay more than market rent.

 

2.         What you see may not be what you get.

 

I have heard many stories from independent retailers about touring one space, but taking possession of a different space. To avoid the old switcheroo, ask the landlord’s leasing representative to verify that the space toured is the space to be rented by providing a site plan of the retail center with the desired space clearly marked.  The marked site plan should be attached to the LOI and the lease to avoid misunderstandings.  

 

3.         Must haves must be on the Table.

 

If an issue is a deal breaker, it should be resolved as part of letter of intent negotiations. Failure to do so will cause all parties to waste time, money, and efforts on a deal that will never happen.  Finding out early whether the landlord will appease will give all parties piece of mind and allow the tenant to move on to another space if its deal-breaker list has not been resolved.

 

4.         Your Home and other Assets May be at Risk.

 

If a tenant has little or no experience operating a store, landlords invariably require the individual store owner to sign a personal guaranty, an obligation to be legally responsible for the obligations of the tenant under the lease. This means that if sales are not enough to pay the rent, the store owner is expected to use his/her personal assets to satisfy rent and other lease obligations.  Failure to satisfy lease obligations can lead to lawsuits and liens upon personal assets such as homes, bank accounts, investment accounts, wages, etc.

 

The personal guaranty requirement is not always listed in the letter of intent. Therefore, if the tenant is not willing to provide such a guaranty, this fact should be included in the letter of intent so that the parties can either reach an alternative arrangement or move on to the next deal or space.

 

5.         A Signed Letter of Intent is not a Lease.

 

A letter of intent memorializes the parties understanding of the material financial terms to be included in a lease, but in most instances, the letter includes a statement that the letter is not binding.  If this “non-binding” statement is included, then the landlord is not likely obligated to deliver the space and the proposed tenant is not obligated to accept the space until a lease is signed (and requires delivery of possession by a certain date and remedies for the landlord's failure to do so).  In this situation, tenants may want to avoid incurring expenses in connection with the space (except broker and legal fees) until the lease is signed.

 

A real estate broker should be relied upon to find a space that suits your business goals and to ensure that the financial terms are comparable to terms obtained by renters of similar space in the area; however, a real estate broker should not be relied upon to draft or review your letter of intent or lease. Given the legally binding effect or the potential thereof, tenants should personally review everything they sign or engage an attorney to do so and explain pertinent terms. 

 

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