You’ve just made the deal. The price or rent is set. Call the lawyer (or not), and whip out a letter of intent (LOI). Although this is perceived to be a simple step by so many, it has potentially far-reaching implications in shaping the business deal and can have quite different legal consequences than what either party intends.
Whether you’re buying or selling a business or real estate property, or entering into a lease, the thought process should be the same: Have I considered all significant business terms? Which side has the most leverage? Do I want to introduce certain key terms now or hold them back for later? Should I keep silent on a point that I know will be controversial? Should the LOI be binding or non-binding? Should it look like a lawyer has been involved?
“Decisions made at this moment can make or break your deal,” says Howard L. Friedberg, a shareholder with Katz Barron Squitero Faust. “If you’re too aggressive, the other side may decide to lease the competing property down the street or seek another opportunity — and you’ll be denied the opportunity even to negotiate further.”
If you’re too weak, adds Friedberg, you may give up a key component that will plague you throughout your deal. If the deal involves a lease that could last for many years, any one omitted provision (e.g., change in use) could have huge consequences down the road.
Smart Business spoke with Friedberg about LOIs, how to truly understand them and how to know when and where to utilize them.
What terms should be included in a LOI?
If you are the party with the most leverage, you may want to include as many terms up front as you can, so they won’t have to be argued later. In the height of the real estate difficulties, some national chain tenants have been actively (although, perhaps less actively than before) doing deals. Because ‘they can,’ they seek to include more than the bare essential elements in their letters of intent.
Conversely, landlords in these troubled times, anxious to reel in prospective tenants — and not scare them away too soon with extra charges, radius restrictions and kickout clauses — might wish to defer the introduction of these second tier business items until later in the negotiations when the prospective tenant is more entrenched in the deal.