The commercial real estate market relies heavily on letters of intent to initiate deals between potential landlords and tenants. The general purpose of these letters of intent is to set forth the terms and conditions that must be met in order for a lease agreement to be reached. A letter of intent is not a final lease agreement.
A letter of intent is almost always a nonbinding, informational document used for the purpose of establishing a foundation for lease negotiations. The letter usually sets forth certain terms and conditions that will likely become part of a binding lease agreement, but the letter is not a legal offer or acceptance of a contract. Without a follow-up lease agreement, a letter of intent is unenforceable.
Agreement to Negotiate
One aspect of a letter of intent may be enforceable. Most letters of intent are signed by both the landlord and the tenant, and most letters include a provision that requires each party to negotiate in good faith toward a final lease agreement. If one of the parties signed the letter of intent and then completely disappears from negotiations, the other party may be able to sue for damages. The law really can't force two people to reach an agreement.
A letter of intent typically contains the critical deal points for a commercial lease agreement. The key terms of a letter of intent therefore generally address the proposed tenant improvement budget, the monthly lease amount, any payments required in addition to the monthly rent, the total space available or wanted for lease, the intended use of the space, whether the lease will contain a purchase option, and the lease term. The general idea is that a landlord or tenant could give the letter of intent to his attorney, and the attorney would have the key terms necessary in order to draft a binding lease agreement.
Although letters of intent are unenforceable as lease agreements, they are still useful in the financing context. A developer or building owner can present signed letters of intent to a finance company in order to prove to the financing company that the property is likely to generate revenues. Thus, letters of intent help projects move forward because they help the owners finance those projects.
- "Modern Real Estate Practice"; Fillmore W. Galaty, et al.; 2007