Letter of Intent: Its Importance When Leasing Commercial Space

  • 7 months ago
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Navigating the world of commercial real estate requires understanding the important terms to make an informed decision when seeking to lease property. A letter of intent (LOI) is a document that outlines important terms between a landlord and a lessee. It’s a non-binding agreement that’s used to define the primary deal points before both parties proceed with an official agreement in the future. It also forms the base of drafting an official legally binding contract.

Why is the LOI a key document in commercial real estate?

Finding an ideal commercial property to lease takes a lot of time, money and effort. It’s a strenuous process, even for expert tenants who are familiar with it. An LOI ensures that both parties are on the same page before deciding to proceed with the transaction. It’s also a great way for landlords to gauge how serious potential tenants are.

Is an LOI legally binding?

Even though a letter of intent may not be legally binding, sometimes there can be a mutual agreement that some sections of the document are legally binding. This is known as enforceable provisions, with an example being an exclusivity period that prevents the landlord from allowing another party to take the space. Unenforceable provisions include the rental rate, payment terms, and renovations required prior to the tenant moving in, which are seen as a starting point for negotiations to begin.

How long is a Letter of Intent?

The average length of a letter of intent is one to twenty pages, but this depends on the complexity of the commercial real estate lease. Overall, an LOI is meant to be a quick and easy way for basic terms to be recorded prior to a real estate attorney being paid to draft and review a lease agreement.

What is the process of using an LOI?

Tenants who wish to present an LOI to a landlord should only do so after reviewing all their options by touring various properties. This prevents a situation where a tenant submits an LOI to a landlord when they have no intention of occupying the space. It also prevents sending out many LOIs to various landlords at once.

Who drafts the Letter of Intent?

Letters of intent are typically drafted by the tenant’s commercial real estate broker after they’ve toured the property extensively and spoken to the owner.

What is typically included in an LOI?

Key terms like the parties involved, property, offer, brokers, and disclaimers are included in an LOI.

Here’s an in-depth look at what each term should include:

  • The parties involved – The names of the tenant and landlord must be included, added to their contact information and home addresses.
  • The property – The address and suite number of the property being leased should be written in the LOI, including a description of the building, lot size, square footage, number of parking spaces, the type of rent being paid, rentable square feet, and any CAM charges.
  • The offer – This part of the LOI includes lease terms (such as rent, annual increases, tenant improvements, subleasing rights, and more), the date for signing the lease agreement, and the LOI’s expiration date.
  • The brokers – All the brokers involved in the transaction should be included, as well as who they represent and the leasing fee paid to them.
  • The disclaimers – This part is inclusive of pre-conditions and a notice that the LOI isn’t legally binding.

A letter of intent is an important document that is drafted by a commercial real estate broker once a tenant has explored all their options. It’s not always a legally binding document, but it should always be created in good faith as it forms the basis for negotiation and drafting a leasing contract.

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