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Using Letters of Intent in Real Estate Leasing Transactions
Everyone wants to do the deal, but no one is ready to sign the lease. Zoning approvals, construction plans, financing, and a host of other issues need to be firmed up before the lease will be signed, but it is a lot of time and expense to go through if there's no agreement on the essential terms of the relationship. Hence, the Letter of Intent (“LOI”). An LOI is intended to, and should, give assurances to the parties, fix the agreed-upon terms of the deal, provide information and assurances to third parties, and provide a framework for further negotiations and the definitive agreement. It can, however, also be a minefield of potential problems and an invitation to litigation. This article reviews some of those problems and suggests ways to accommodate the parties' needs while avoiding the most common dangers.
Is a Letter of Intent Necessary?
LOIs are appropriate for ascertaining issues of significance to one or both parties. If the parties cannot agree on the significant issues that are often included in an LOI, such as co-tenancy provisions, opening and operating covenants and exclusives, they are unlikely to spend the time and money to negotiate and prepare a final lease or investigate the feasibility of the transaction. Nevertheless, before entering into an LOI, one should think carefully about whether it is truly necessary. Too often, LOIs are viewed by the disappointed party as a binding agreement that the other party has breached, while the withdrawing party views the LOI as merely a prelude to negotiations. If circumstances are such that an LOI is required, the LOI should be reviewed by counsel to ensure that the language protects the parties' interests.
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