Letters of intent (LOI) for leasing space may not be binding contractual documents, but they can set the stage for smooth lease negotiations which result in fewer legal costs, and save you money in the long term by forcing you to consider your needs and plans. Often, LOIs do not provide an accurate and practical framework for what landlords and tenants ultimately hope to achieve. The following are a few major issues to address at the LOI stage of a lease negotiation:
Never agree to a hard date for rent commencement because, remember, you do not want to be paying for space that you do not have or cannot operate from. Rent commencement should be tied in some fashion to delivery of the premises and performance of any required buildout.
Risk of late delivery
Are you moving out of a current space into the new space? Is the new premises going to be built out or is there another tenant currently in there? If the answer to these questions is yes, then (1) consider when you need delivery to occur by and state that expressly in the LOI, and (2) consider having penalties for late delivery. Penalties can take many forms—additional rent abatement or even payment of any holdover penalties that you may have to pay at your current space if you do not timely move out.
Buildout and costs
Who is doing the buildout, who is paying for the buildout, and how will determination of the scope of the buildout occur? If the landlord is doing the buildout (sometimes referred to as a turnkey), then the detailed scope of that work will need to be agreed to by the time the lease is executed. This is both the case if landlord is paying for the entirety of the work, and particularly if the landlord is only paying up to a certain ceiling, with the tenant paying the remainder.
If the tenant is doing the work, be clear on what condition the premises will be delivered in—will there be furniture and equipment in the space from a prior tenant that will have to be removed? Will tenant have to perform any unexpected demo work? Are building systems and structural components in good condition? If tenant is performing the work and receiving a tenant improvement allowance, consider if you plan to go out of pocket and recoup the allowance from the landlord afterwards, or do you expect the landlord to pay your contractors directly so that you will not have to go out of pocket. If you expect total buildout costs to exceed the amount of the allowance, do you expect the allowance to be paid before you pay for the excess costs?
Landlords often charge management or supervisory fees related to any buildout (regardless of who does the work), and unless the landlord is doing the work and paying for it without any ceiling, you should try to eliminate these fees, cap them, or ask for a higher tenant improvement allowance in order to pay these fees out of the allowance.
It is imperative to choose a broker who considers these issues and asks you all of these questions; and if it is too late to choose such a broker, then choose a lawyer who will. Failure to ask these questions will result in longer (and more expensive) lease negotiations, and failure to ask them at both the LOI and lease stage will result in a number of unpleasant surprises and expenses during the life of your lease.