Commercial leases are an interesting and complex vein of the real estate industry. As opposed to residential real estate, just about every aspect of a commercial lease is subject to negotiation. As a result, the process of negotiating and executing a commercial lease can be a very complex and extremely detailed exercise.
The first phase of negotiating a commercial lease usually begins with the Letter of Intent (“LOI”). It is common for the parties involved in a commercial lease to come to a preliminary “meeting of the minds” when contemplating a commercial leasing agreement. The potential parties to a lease agreement will enter into an LOI for the purposes of coming to this preliminary agreement. Once the parties initially agree on how the most material and complex issues will be handled in the lease, the actual drafting of the lease agreement will be a mere exercise in implementing the major terms . . . in theory of course.
An LOI is utilized by the landlords and tenants as the agreement to agree on the most material leasing terms. The party proposing the initial terms of the lease will establish the various material terms of the lease agreement. The usual and obvious components of the LOI include gross leasable square footage, the leasing rate per square foot, the initial term of the lease as well as any proposed extensions, the proposed use of the premises, and the amount of the deposit. However, additional terms of a LOI, especially in larger or more complex properties, often involve items such as the calculation of Common Area Maintenance charges, study periods, the terms of any potential tenant improvements, environmental concerns and ADA compliance issues.
The various terms included in the LOI will be largely driven by a myriad of factors. For example, premises leased in a shopping mall will not necessarily deal with parking assigned to the premises and conversely, premises in a free standing building will not want a preliminary meeting of the minds regarding building security expenses. As a result, the terms included in the LOI are largely dependent upon 1) the nature of the premises and 2) what is particularly important to the parties involved.
With limited exceptions, the LOI is generally a non-binding understanding of the parties as to the major points of a lease agreement. In fact, the lone binding provision of the LOI will be the confidential nature of the information exchanged between the parties and that such information will be kept confidential by the respective recipients. Due to the non-binding nature of the LOI and a party’s duty to conduct its own due diligence, parties will usually not be held liable for misrepresentations of the law within the LOI. See Unity Farm Construction, Inc. v. Slab town Limited Partnership, 24 Va. Cir. 242 (Spotsylvania 1991) (Spotsylvania Circuit Court held that a misrepresentation of the law does not amount to actionable fraud).
When entering negotiations for the leasing of real property, the practicing attorney is sometimes brought in for counsel at the stage of drafting and completing the LOI. Otherwise, the broker plays its most important and prevalent role in this phase of the negotiations. Either way, the LOI is the proverbial cog that makes the negotiations wheel turn in a productive and efficient manner.