Important Terms for Startups and Small Businesses to Consider When Reviewing a Letter of Intent and Commercial Lease

You’ve established your business, and finally found the perfect commercial space to lease.  Suddenly, you are tasked with reviewing a draft of a letter of intent and a draft of a 20-page lease for the commercial property from your landlord, both of which contain terms you’ve never confronted and/or legalese you do not understand.  What to do?

In this blog post, the ladies of Smith Shapourian Mignano LLP briefly outline the purpose of these two key documents, and the types of provisions that you may encounter during your review of these documents.

Letter of Intent

After the tenant (i.e., you or your business) and the landlord have agreed upon the most basic substantive terms of the commercial lease (i.e., rent, utilities, use of the space, etc.), the landlord may offer you, the tenant, an initial draft of either: (1) the lease agreement; or (2) alternatively, a letter of intent (“LOI”) which basically conveys the parties’ basic understandings of the terms of the anticipated lease, and conveys that the parties are both serious and ready to move forward.  LOIs are common precursors to leases, and so many businesses leasing commercial properties may receive preliminary drafts of LOIs from their landlords.

There are benefits to reviewing and editing an LOI before receiving the actual lease.  Having a well-drafted LOI may significantly reduce the back-end lease preparation and negotiation costs.  Second, the LOI memorializes the pre-lease negotiations and understandings by both of the parties, and provides a basic outline for the eventual lease.  Third, an LOI provides the ground rules for a lease negotiation, and ensures that both parties are serious about moving forward with a lease before either spends a great deal of effort and funds negotiating the lease terms.

However, some landlords draft LOIs as “binding” LOIs, and so, agreeing to a binding LOI for a commercial property can also be risky for a business owner.  A binding LOI is essentially a contract.  If you are not careful during the review and re-drafting process associated with the LOI, you may be forced to accept terms that you never intended for the eventual lease.  LOIs may also result in some confusion, as they are not comprehensive and do not necessarily include all the terms in the lengthier lease document.

Nevertheless, here are some key terms in LOIs that you and/or your attorney should review:

• The parties (i.e., the identify of the landlord and tenant);
• The nature of the property or premises, specifically the address of the intended commercial property subject of the lease and any other storage rooms, kitchens, conference rooms, parking lots, etc. that are included as a part of the property or premises;
• Any allowances for improvement(s) of the property or premises;
• Term of the lease and renewal options;
• Rent and security deposits;
• Utilities, code compliance, janitorial services (if applicable), trash services, etc.
• Real estate taxes, which are usually designated as paid by the landlord;
• Maintenance responsibilities of the tenant as opposed to the landlord;
• Insurance by the tenant;
• Signage by the tenant;
• Assignment and/or sub-leasing/subletting opportunities for the tenant;
• Termination of the lease;  
• Due diligence of the parties; and
• A brief outline of outstanding terms (usually legal in nature) to be included in the lease.

Lease

Most of the aforementioned bullet-pointed items in the section above regarding LOIs are eventually included in the subsequent draft of the commercial lease.  In fact, if the LOI is well drafted and the pre-lease negotiations are thorough, the subsequent commercial lease’s terms and conditions should not come as a surprise to the commercial tenant.  Of course, the aforementioned substantive list items should be double-checked and reviewed for consistency in the draft of the commercial lease.  

The commercial lease will also include some legal terms, some of which may not have been mentioned in the LOI.  Below is a non-exhaustive list of additional legal terms that you and/or your lawyer should review before signing a lease:

• Choice of law:  Usually, this term will indicate the law of the state in which the property or premises subject of the lease is located.
• Dispute resolution:  The landlord may include a draft of the lease with either an arbitration clause or addendum; or alternatively, a jurisdiction clause that allows either party to bring a lawsuit for any disputes arising out of the agreement.  The jurisdiction clause will usually specify venue of a potential lawsuit or arbitration, which is usually designated as the county in which the property or premises subject of the lease is located.  There are benefits of arbitration (click here for our previous blog post) versus going to court to resolve disputes arising from the lease.  You should contact an attorney to advise you which is the best option for your situation, as there is no one-size-fits-all approach to dispute resolution.   
• Indemnification:  The landlord may include a draft of the lease which contains an indemnification clause (or a few indemnification clauses).  Indemnity is an obligation by a person (i.e., indemnitor) to provide, in most cases, money, for a particular loss suffered by another person (i.e., indemnitee).  A landlord can include various indemnification clauses in the lease which shift responsibility to you or the landlord for certain items and/or damages (i.e., hazardous substances, environmental damages, repairs of a specific nature, etc.).  It is important that you seek advice of counsel to ensure that: (1) you are not being required to indemnify your landlord for out-of-the-ordinary items in your lease; and (2) to ensure that you completely understand your obligations under indemnification provision(s), which can contain a lot of bulky legalese that is difficult for laypersons to understand.
• Attorneys’ Fees and Costs:  This term or provision may address whether the prevailing party in a court action, arbitration, and/or mediation may recover attorneys’ fees and costs.  Conversely, this clause may indicate that each party pays for their own attorneys’ fees and costs, irrespective of who prevails.
• Notice:  This term or provision usually addresses when and how the parties notify each other in the event of dispute or concerns arising out of the commercial lease.

In sum, there are a fair number of terms in a lengthy commercial lease.  It is not uncommon for commercial leases to span 20 pages or more, if there are addendums included with the commercial lease.  It is not only important that the terms accurately reflect the parties’ prior understandings, as perhaps documented in the LOI, but also that you, as the business owner and tenant, fully understand your obligations under the commercial lease.

Smith Shapourian & Mignano, LLP is available to answer any questions or concerns you may have regarding your business’ commercial lease and related documents such as LOIs.  We have also successfully negotiated commercial leases on behalf of our business clients.  You may contact us for a consultation if you have questions regarding your LOI or commercial lease.

This blog does not constitute solicitation or provision of legal advice, and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter in a timely manner, as statutes of limitations may bar your claim.