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Let’s Make a Deal – What You Should Know About Letters of Intent

By Bernard B. Kolodner

Whether you are leasing real estate or buying or selling a business or real estate, the letter of intent (LOI) is the usual and practical initial step. An LOI or term sheet is how you find out if you are likely to have a deal before you spend a lot of time or legal fees on the deal.  The details included in an LOI will be largely dependent on whether the deal proposed is a lease, sale or purchase of real estate or a business.

For a lease, an LOI will often specify the space, rent, security deposit, term, extensions, and commencement. In addition it might include provisions covering work to be done on the space, who will be responsible for the work (landlord or tenant) and the amount of any tenant improvement allowance.  Reviewing the LOI is the quick and easy way to gauge the interest of the person on the other side of the deal as well as identifying whether there are unbridgeable business issues that need to be addressed prior to drafting the lease.

The purpose of an LOI is to lay out the broad terms of what will be included in the lease not the fine details such as whether to provide for 15 or 30 days to cure defaults, what kind of insurance the landlord and tenant must carry, and many other provisions that are common in leases. That being said, any special issues on either side should be disclosed in the LOI.  Examples include, if the tenant is going to spend a lot of money improving the space, it is well advised to bring up the availability of a non-disturbance agreement from landlord’s lender right away.  Similarly, if the tenant has a particular sign format or logo, the standard lease provision that signage must comply with law and be subject to landlord’s consent which shall not be unreasonably withheld is not sufficient.  If the landlord has plans to re-pave the parking lot or renovate the common areas, the arrangements to handle the awkward time when the work has started but is not complete will be best received by the tenant if it is put on the table early on, in the LOI.

An LOI for the purchase and sale of real estate will include the description of the property, set the purchase price, establish the deposit, put outside dates on closing and due diligence, set a location for closing, if it is not done by mail, and establish any other conditions. The other conditions a buyer typically raises can be financing, issuance of permits for zoning or construction, obtaining a liquor license or a particular franchise.  Sellers may request to delay closing until next year or provide for a tax exempt exchange.  Identifying these details in the LOI is advisable so as not to complicate and/or potentially lose the deal later in the process of sale or purchase.

An LOI for the purchase and sale of a business requires detailed enumeration of the transaction structure (including whether the purchase will be of assets or stock) as well as the consideration to be paid (including the amount of cash paid at closing, and any indemnification escrows/holdbacks and earn-outs). The conditions to the closing of the transaction should be set forth in the LOI (including if any key members of management will be required to sign employment agreements, or if a lease of property owned by the seller’s principals must be signed at the time of the closing of the transaction), along with pre- and post-closing covenants (including exclusivity and non-competes).  The inclusion of customary representations and warranties in the definitive agreement can be mentioned in the LOI and negotiated in more detail later, but any atypical representations that the buyer may insist on should be documented more thoroughly.  In the alternative, the seller may attempt to exclude most representations and warranties by disclaiming that the sale is “as is” in the LOI.

The common thread of a detailed LOI, whether for a lease, sale or purchase, is that it takes away the element of surprise of a new business term being introduced well into deal discussions that will likely not be received well by the other party and may even be a deal breaker.

For more information on the dos and don’ts of LOIs or for other real estate related questions, contact Bernie Kolodner at bkolodner@kleinbard.com or at 215.496.7226.