Surprise! Your Letter of Intent is a Lease
Jeffrey Margolis Oct. 30, 2013, 7 a.m.
The Letter of Intent, or LOI, has become ubiquitous in New York leasing, especially in larger transactions where the document itself will be of substantial complexity.
It’s used to initiate transactions and is designed to set forth in some cogent way the terms and conditions of the proposed deal. Usually drafted by the broker, it’s the foundation for lease negotiations and a map to be used by landlord’s counsel in document drafting.
Essentials include the parties (and guarantors), the premises, term, rent and escalation items, permitted use, TI allowance, free rent period, landlord’s work, assignment and subletting provisions and security deposit/guarantors. Tenant specific special items such as signage and options to renew or ROFOs should be included here rather than left for the clutches of the “Landlord’s form.”
If properly drawn, the parties get focused on the terms of the deal, and if there are hot button issues they can be dealt with early on—at least ascertaining whether a point is a deal breaker. Often the use of specifics in the LOI works in the tenant’s favor. That’s when down the road, with that very restrictive pro-landlord standard form now on the table, the tenant can make its declaration of rights and sweepingly point to the favorable LOI provision in question. I hasten to add that landlord’s counsel is also quick to reply “It’s not in the LOI” when the tenant requests any special lease form modifications.
There are some provision of the LOI that a party will want to be binding, like an agreement to stop marketing the premises, confidentiality, or a blanket statement that the parties will negotiate in good faith to achieve an executed lease. The LOI’s produced by the city’s elite brokers typically have enough magic non-binding language as needed.
They include a disclaimer of any binding intent except as specifically set forth and an express statement that neither party shall be bound “unless and until a lease, satisfactory to all parties and counsel, is fully executed and delivered.” That’s enough, right? Yes, should be.
That said, here are some examples where a court, looking to ascertain the intent of the parties, ruled the document was binding: the LOI ended: “Please sign to indicate your acceptance of this offer” (binding); or where conduct shows intent: taking possession and paying rent (held: binding lease). And as to that agreement to negotiate in “good faith” a California case (Copeland v. Baskin Robbins) found a prospective tenant in breach of contract when it unilaterally withdrew from negotiations. This was not a ruling on the LOI per se; the court could not force the parties to agree on terms, rather by promising to proceed in good faith the Court ruled they had created a separate contract which the prospective tenant breached. (“…a party [may] sue for breach of a contract to negotiate an agreement….”)
The LOI has been called a good roadmap, but it’s also fraught with hairpin curves and precipitous fall-offs if not properly drawn.