Shakespeare wrote “To be or not to be, that is the question.” In doing a real estate lease, a tenant should ask, “To put in the letter of intent, or wait for the lease?” One of the common mistakes I often encounter is clients wanting to rush prematurely to get a deal to a signed letter of intent which is the trigger to draft a lease. While in a fast moving market a tenant may not have a choice, in most markets a tenant would be well served to have as many deal points hammered out in the letter of intent as possible.
There are two primary reasons for this strategy.
First, it maximizes the tenant’s leverage as once a letter of intent is signed, the power of negotiation often shifts to the landlord as the tenant is often mentally committed and runs out of time to change strategies.
Second, it allows for thorough planning for the rest of the transaction from finalizing the lease to construction to move in.
A typical basic letter of intent includes the start date, term, rental rate and basic lease concessions such as rental abatement, tenant improvements, expansion and renewal options. These are all key factors that form the basis of a lease. However, a more sophisticated tenant representation broker will expand on these basic concepts to include other items including how to handle operating expenses, assignment/subleasing provisions, condition on surrender, ability to make alterations, penalties in the event the landlord can not deliver the space on time and in the right condition, procedures to determine fair market rent upon renewal, and many other items. While these are often addressed in the lease, the ability to make key changes is often diminished at a later stage of the negotiation.