Part 5 – The Letter of Intent

For purposes of this article, the negotiation process begins with the Letter of Intent (or LOI), which can only be developed after the tenant understands its needs. The LOI represents a compilation of the many considerations that a tenant might have. All of the tenant’s needs and core requirements (both business and legal) should be considered when developing the LOI, as it is difficult to obtain the best result when important considerations are introduced late in the negotiation. Further, the LOI should be consistent with market conditions and what the particular tenant can attain in the current marketplace (i.e. Fortune 500 credit will normally be able to ask for more than a smaller tenant with local credit) and the LOI should be customized to properly reflect the same.

The LOI, once presented, becomes the basis for the negotiation and helps maintain a focus on issues not fully resolved between the parties. Even if non-binding, deviating from terms agreed upon in the LOI is difficult. Accordingly, the importance of initially addressing all significant items in the LOI cannot be overemphasized. For example: (1) the tenant’s negotiating leverage will be reduced if provisions such as options to extend or terminate, liability limitations, escalation and security deposit provisions, rights of first refusal, and other items of significance are not included in the LOI, and (2) it serves everyone’s interests to spend extra time on the details of the LOI to minimize misunderstandings during negotiations, together with the associated cost of attorneys and other professionals engaged by the parties. To preserve that the LOI will not be binding, the document should not only provide as such, but should further provide that it imposes no legal obligation to continue negotiations to reach agreement. Alternatively, the parties may be obligated to negotiate in good faith, and if no formal agreement is reached within a prescribed period of time, either party may terminate negotiations.

As a result, it is important to employ an effective method of tracking the progress made on deal points, while also assuring that the original points eventually are addressed. This has the added benefit of documenting the negotiation, which is useful to understand the intent of the parties and to draft language accurately reflecting all negotiated points.