real estate leasing letters of intent: obtaining...
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Real Estate Leasing Letters of Intent: Obtaining Favorable Terms and Avoiding Protracted Negotiations Structuring Effective LOIs and Minimizing Enforceability Pitfalls
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THURSDAY, FEBRUARY 12, 2015
Presenting a live 90-minute webinar with interactive Q&A
Manuel Fishman, Shareholder, Buchalter Nemer, San Francisco
Sujata Yalamanchili, Partner, Hodgson Russ, New York
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REAL ESTATE LEASING LETTERS OF INTENT:
OBTAINING FAVORABLE TERMS AND AVOIDING
PROTRACTED NEGOTIATIONS
By Sujata Yalamanchili, Esq. [email protected]
I. ADVANTAGES OF USING LETTERS OF INTENT IN
LEASE TRANSACTIONS
Creating a meeting of the minds
A letter of intent or term sheet allows the parties to confirm there is a
meeting of the minds on key business terms before investing the time and
expense of negotiating lease documents.
RFPs.
Some sophisticated tenants require landlords to provide term sheets as part
of a comprehensive RFP process, allowing the tenant to compare deals from
various landlords side by side.
Institutional Landlords – often, a letter of intent is required before outside
counsel will be authorized to begin preparing the lease.
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I. ADVANTAGES OF USING LETTERS OF INTENT IN
LEASE TRANSACTIONS
Uniformity
Some large tenants with many locations (e.g. a retail tenant) might want uniformity of deals among locations throughout the country. Using a letter of intent allows them to conform multiple deals with different brokers and different landlords, using a uniform format.
Overlooking Key Issues
Letters of Intent can also highlight for landlords and tenants, certain key issues they might have overlooked.
Ease of Drafting and Negotiating Lease
A well-crafted and well thought out letter of intent should permit the attorneys to prepare a lease in a more efficient manner and it should cut down on extensive negotiation
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Letters of Intent Binding vs. Non-Binding
Presented by
Manuel Fishman 415.227.3504
www.buchalter.com
Binding vs. Non-Binding
General rule is that the terms of a Letter of Intent are non-
binding
Meaning:
• no intent to create a contract
• no implied covenant to negotiate on terms
• right of landlord to obtain other offers
• ability of either party to terminate negotiations at any time
See Appendix 1 Sample Language
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Binding vs. Non-Binding
See Copeland v. Baskin Robbins USA 96 Cal.App 4th 1251 (2011)
•Relying on Channel Home Centers vs. Grossman
795 F.26 291 (3rd Cir. 1986)
When two parties, under no compulsion to do so, engage in negotiations to form or modify a contract
neither party has any obligation to continue negotiating or to negotiate in good faith. Only when the
parties are under a contractual compulsion to negotiate does the covenant of good faith and fair dealing
attach, as it does in every contract. In the latter situation the implied covenant of good faith and fair
dealing has the salutary effect of creating a disincentive for acting in bad faith in contract negotiations.
We believe there are sound public policy reasons for protecting parties to a business negotiation from
bad faith practices by their negotiating partners. … The parties should have some assurance "their
investments in time and money and effort will not be wiped out by the other party's footdragging or
change of heart or taking advantage of a vulnerable position created by the negotiation."
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Binding vs. Non-Binding
•But see GMH Associates vs. The Prudential Realty Group
2000 PA Super 59 (2000)
Appellant’s contention that the letter of intent in this case created a binding promise to negotiate a formal
lease must fail. There is no cause of action to enforce a contract absent a mutual manifestation of assent
to be bound. [Citations omitted]. The letter of intent in this case does not disclose any agreement, not
even an agreement to negotiate.
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Binding vs. Non-Binding
Possible Binding Terms
• Landlord to pay for a test fit or space plan.
• Tenant indemnity for plans if negotiations terminate.
• “No shop” clauses (exclusive negotiations).
• Confidentiality provisions.
• Outside date for “acceptance”.
• Note: Common to see binding provisions in Purchase and Sale
letters of intent
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REAL ESTATE LEASING LETTERS OF INTENT:
OBTAINING FAVORABLE TERMS AND AVOIDING
PROTRACTED NEGOTIATIONS
By Sujata Yalamanchili, Esq. [email protected]
III. NEGOTIATING SPECIFIC TERMS OF THE L.O.I.
Rent
Term and Renewal Options
Options (including renewals and expansion/contraction)
Security Deposits
Operating Expenses, including audit rights
Square Footage
Assignment/Subletting
Build Out, Construction Allowance, Terms of Construction
Use/Exclusive Use
Parking and other Amenities
Signage
HVAC
Identifying the broker
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IV. ENFORCEABILITY OF THE L.O.I.
Does a letter of intent or term sheet create a legally binding obligation?
A. Generally, an LOI is not enforceable or binding, but it can be enforceable, in certain circumstances
B. Traditional contract principles apply to determine if an LOI is binding
C. To be valid and enforceable, the parties must have reached a final agreement on all the essential/material terms, including, but not limited to, the area to be leased, duration of the lease, and the price to be paid, without reservations of any term for future negotiation.
D. Terms in the LOI are extremely important: a best practice is to include a provision in the LOI stating that the LOI does not create any legal, enforceable, and/or binding relationship between the parties
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ENFORCEABILITY OF THE LOI
Even if a binding agreement is not created, the LOI probably creates an obligation on the parties’
part to negotiate a transaction in good faith
A. what is “good faith”? Neither party may engage in conduct that will injure or frustrate the
rights or interests of another party to the agreement
B. failing to negotiate at all and walking away simply because you get a better offer is
probably bad faith
C. trying to negotiate a deal but terminating the agreement when the parties can’t reach
agreement on key terms which weren’t spelled out in the LOI is probably good faith
D. a tenant was found not to have breached an implied covenant of good faith by failing to
lease property, where an express condition precedent in the letter of intent required the
tenant’s board of directors to approve the lease and the board failed to approve the lease
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www.buchalter.com
Letters of Intent Drafting Pitfalls
Presented by
Manuel Fishman 415.227.3504
www.buchalter.com
Drafting Pitfalls
Confusing Purposes
• A Letter of Intent is not a marketing tool. Omit references to building
“amenities” or to “first class”.
Over negotiating the Letter of Intent
• Rely on “TBD”
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Drafting Pitfalls
The danger of providing estimates in Letters of Intent
• See Thrifty Payless vs. The Americana at Brand 218 Cal.App 4th 1230 (2013)
Case involved a Letter of Intent that contained “estimated” charges for
taxes, insurance and common area maintenance expenses.
See article attached as Appendix III
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Drafting Pitfalls
Facts of the case
• Letter of Intent contained “estimated” charges
• Landlord’s Vice President of Leasing provided a budget during
lease negotiations
• Lease was entered into
• When first bill was generated, charges for CAM including taxes and
insurance were 2 to 3 times higher than estimate
• Thrifty objected
• Lease contained a comprehensive integration charge
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Drafting Pitfalls
Holding of case
• Statements (i.e. the estimate) are actionable if the two elements of
fraud are present:
(i) negligent or intentional misrepresentation; and
(ii) justifiable reliance
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Drafting Pitfalls
Remedial actions
• Estimates need to be supported by good faith
• Any estimate should be stamped or accompanied by a statement
“this [budget] is merely an estimate based on the current knowledge of landlord. The figures
herein may change significantly based on unknown future events. No reliance should be
made based on the figures contained herein. Landlord has no duty to update this
[budget].”
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Appendix I
Sample language of Letter of Intent
This letter/proposal is intended solely as a preliminary expression of general intentions and is
to be used for discussion purposes only. The parties intent that neither shall have any
contractual obligations to the other with respect to the matters referred herein unless and
until a definitive agreement has been fully executed and delivered by the parties. The
parties agree that this letter/proposal is not intended to create any agreement or obligation
by either party to negotiate a definitive lease/purchase and sale agreement and imposes no
duty whatsoever on either party to continue negotiations, including without limitation any
obligation to negotiate in good faith or in any way other than at arm’s length. Prior to
delivery of a definitive executed agreement, and without any liability to the other party,
either party may (1) propose different terms from those summarized herein, (2) enter into
negotiations with other parties and/or (3) unilaterally terminate all negotiations with the
other party hereto.
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Appendix 2
Manny Fishman Article
Estimates in Letters of Intent Can Come Back to Bite
http://www.buchalter.com/publication/estimates-in-letters-of-intent-can-come-back-to-bite/
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Appendix 3
Manny Fishman Biography
Manuel Fishman is a Shareholder in the firm’s Real Estate Practice Group in San Francisco. Mr. Fishman focuses his practice on representing
real estate developers, owners and secured lenders in the acquisition, sale and financing of commercial properties. In addition, he has
an active leasing practice representing owners of several major office buildings in San Francisco, as well as tenants in lease and
sublease transactions. His expertise includes letters of intent, tenant improvement work agreements, security deposits/letters of credit,
signage rights, expansion and contraction rights, permitted transfers, operating expense audits and lender and master landlord
recognition agreements.
Mr. Fishman represents clients in equity structuring for, and the acquisition of, distressed properties and real property secured debt, including
the formation of single purpose entities and joint ventures. The clients he represents invest regionally with various joint venture partners
in a variety of property types, and these transactions present unique structuring and project management issues. Mr. Fishman has
negotiated numerous construction management, project development and property management agreements relative to ground up
development projects, as well as all types of easements and other adjoining owner agreements.
415.227.3504
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