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Sample Retail Tenant Deal Letters
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Also referred to as a "letter of intent," such documents are important to both a Landlord and a Tenant involved in a tenant lease transaction. Given the length of time it takes to negotiate and execute a full lease document, most Landlords and Tenants use LOI's - or deal letters - to ascertain in an expeditious manner whether essential agreement exists for business terms of a potential lease. The comfort provided in a letter of intent can allow the parties to move forward.
A tenant deal letter should include each major provision that will ultimately appear in greater detail in the full lease document. This allows the good faith of the parties to guide all subsequent deal documentation.
Traditionally, a landlord and prospective tenant have preferred a fully binding letter of intent in which all of the material terms of the deal have been agreed to and which requires the parties to negotiate in good faith to achieve a final lease document. Such a letter of intent may be important to parties who want to move very quickly to strike a deal, or who are not comfortable risking the time or resources necessary to negotiate a lease without protection against the other party backing out, even at the last moment. However, in today's fast paced commercial real estate market, such letters of intent are increasingly rare.
An essential element of these deal letters is whether or not the parties to the transaction - the Landlord and the Tenant - wish the LOI to be binding or nonbinding. In today's real estate world, it is rare for an LOI to be of a binding nature to both parties. A strong Tenant with clout, may succeed in either binding the LOI, or not, based on what is best for the Tenant. Likewise for a Landlord with a highly desired commercial location to let. However, in most cases, the power is relatively even, and neither party will allow itself to be bound prior to full formal documents to be drawn. What can be agreed to, is an affirmation to negotiate in good faith to a final binding lease agreement, based on the LOI put together by the parties. But a good faith attestation is rarely enforceable. However, absent some change in circumstances or new information about the Landlord, the Tenant, or the property, the parties generally honor such letters of intent as if they are legally binding.
In crafting deal letters for tenant leases, the following outline indicates what should typically be covered in such follow-ups. It is usually quite important to state that all provisions of a deal letter (or letter of intent) will be as further defined in the formal lease agreement by and between Landlord and Tenant.
- Project Name
- Change of Concept/Name - A deal letter will specify, for some tenants, the right to change the venue concept and/or name with Landlord's written approval, and for such approval by Landlord to not be unreasonably withheld.
- Landlord Legal Entity
- Tenant Legal Entity
- Tenant Trade Name
- Guarantor - Any personal guarantees would be subject to Landlord's approval of Gurantor's audited or certified current financial statements, with such approval to be in Landlord's sole and absolute discretion.
- Security Deposit - A project will typically operate with a minimum requirement, such as two (2) months of Minimum Rent, but adjusted based on the review of Guarantor's current financial statements.
- Premises - Here the Tenant's approximate occupied and leased space is sized and located within the facility. As per usual, the premises specification is commonly detailed in a final lease outline drawing or similarly-named exhibit.
- Radius Restriction - This provision will vary based on the type and drawing power of the Tenant involved
- Liquor License - In the case of a restaurant, entertainment, or club lease, a Tenant lease that contemplates operation with a liquor license will typically have a cancellation clause should the liquor license not be secured initially or if the license of lost while the facility is operating.
- Non-Disturbance Agreement - Landlords will in some instances, provide a non-disturbance agreement to Tenant, and such an agreement is usually a separate, accompanying exhibit to the deal letter, and later, to the Tenant Lease itself.
- Permitted Use - This provision is quite important to both parties and is a risk management tool of both Tenant and Landlord. A Tenant will always prefer flexibility in this definition, and a Landlord will many times be interested in carefully proscribing what a Tenant may do - in order to preserve opportunitiies for possible other tenants.
- Primary Term - A five-year term if very common, but this will vary based on both Landlord's and Tenant's dealmaking guidelines.
- Option Period
- Minimum Rent - Tenant's minimum is stated, as well as any basic rent step-ups wihtin and between the Primary Term and any Option Periods.
- Rent Abatement - Any adjustments, discounts, etc., are typically stated here.
- Percentage Rent - Many leases are rented so that the percentage rent occurs at the so-called natural breakpoint of sales productivity and percentage lease rate.
- Rental Commencement
- Projected Opening Date - Landord will state here the best estimate for overall facility opening, and provide an affirmative obligation to inform Tenant with a prior written notice period at the end of which Landlord will turn over the Premises to Tenant.
- Outside Possession Date - Self-explanatory, simply that date, later than the Projected Opening Date, that sets a reliable outside date for turn over of Premises to Tenant.
- Common Area Expenses, Insurance, and Uncontrollable Costs - Retail tenants pay their share of these expenses, typically based on an amount per square foot occupied by the Tenant.
- Real Estate Taxes - Same as above, in terms of methodology.
- Grand Opening Contribution - At times, Tenants are asked to pay a one-time fee for Grand Opening activities.
- Promotional and Marketing Fund - Completely subject to negotiation, but usually based on a specified amount per occupied square feet.
- Landlord's Improvements and Tenant Improvement Allowance - Landlord will commonly specify the base conditions of the tenant space as delivered, including such items as HVAC, sprinkler system, and electrical system.
- Tenant's Improvements - Simply an affirmative statement that any tenant finish or buildout costs not covered by Landlord, remain at all times as the Tenant's responsibility.
- Signage - Affirmatively stated as designed, manufacturered, and installed at Tenant's cost, unless otherwise specified, and subject to Landlord's Signage Criteria.
- Hours of Operation - Where necessary to the facility's success, hours of operation are ofetn noted as part of a deal letter, and later, in an executed tenant lease agreement.
- Parking - Both patron and employee parking needs to be specified or indicated as part of Landlord's rules and regulations with respect to facility parking.
- Kick-Out - Whether or not Tenant can kick out of the facility after a set number of months of operation, and upon specified term for such an action.
- Brokerage Commission - Landlord and Tenant typically represent and warrant to each other that each has not dealt with any real estate agent or broker other than those known to the parties as presently involved.
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Stonecreek Partners Resource pages are provided freely and without limitation for personal, private, non-commercial use, and may be linked to as a source page. All resource page information is based on 30 years of practitioner's experience of Stonecreek Partners' principals, in the retail, entertainment, hotel, residential, and commercial real estate industries.
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