Letter of Intent

As negotiations for your commercial space proceed, you and the landlord will have talked over the key terms, such as the length of the rental, when the space is available, whether you can expand the space (and renew), and who pays for renovations. If you find there's mutual interest in your becoming a tenant, the next step is often—but not always—for the landlord to give you a proposed lease to review. The lease will normally contain the terms you and the landlord discussed, plus a number of other legal clauses intended primarily to protect the landlord's interests.

Sometimes, however, there's an intermediate stage between the courtship (your mutual interest in doing business) and marriage (signing the lease itself). Think of it as "getting engaged." Like a romantic engagement, this stage reflects your serious commitment to making the deal (the marriage) happen. In real estate lingo, this period of serious commitment is reflected in a written document, called a "letter of intent."

What's In a Letter of Intent?

A letter of intent may be written by the landlord or the landlord's lawyer, or by you or your lawyer. The letter summarizes key issues that you've already discussed, such as the issues mentioned above, and may mention other aspects of the lease negotiations, such as a timeline for improvement work and moving in. The letter can be legally binding or nonbinding, depending on how it's written and how you and the landlord treat it. In short, the letter of intent may be a mini-lease or a simple road map for future negotiations.

The Value of a Letter of Intent

A letter of intent can play an important psychological role in your developing relationship with a potential landlord. The letter highlights the important issues that have either been resolved or will need to be worked out cooperatively. The letter reflects your belief that a deal is seriously possible, making it more likely that both of you will be comfortable committing additional time and money to make it happen. (For example, you'll feel better about paying a lawyer to review a lease if you know with some certainty that the deal isn't likely to fall apart.) And the letter can perform an important housekeeping function, setting the negotiating steps that will help make the process move more smoothly. In Writing a Non-Binding Letter of Intent, we show you how to write your own letter of intent without making it binding.

When You Don't Need a Letter of Intent

Sometimes, however, using a letter of intent isn't necessary. For one, if the deal between you and the landlord is quite simple and straightforward, it may be simply a waste of time for you or the landlord to write a letter of intent. You both might be better served by getting right to the lease. In fact, in the majority of small business lease deals, you're better off doing just that.

This article was excerpted from Negotiate the Best Lease for Your Business by Janet Portman