arizona lease attorney
Real Estate Owners and Agents: Time to Tighten Up Those Letters of Intent
Sure, deals are scarce right now and nitpicking deal point language may be the last thing real estate owners and agents want to hear. However, a well drafted letter of intent (”LOI“) is critical to laying the groundwork for each party’s expectations in a deal and avoiding sticking points in contract negotiations. In contrast, LOI’s that omit important deal points for one or both parties often sidetrack a deal while the material term is being considered and integrated into the contract documents. To prevent surprises in purchase and sale or lease transactions, agents and their clients should carefully develop a list of material terms to be included in any LOI. Checklists or form letters of intent are available as starting points for any deal, although every deal is different and will present different issues to be addressed in a LOI.
For lease transactions, consider the following sample of terms to address in a LOI:
1. Lease contingencies. A tenant may want a due diligence period to investigate entitlements such as building permits, liquor licenses, to review the status of title, or to obtain an appropriate non-disturbance agreement from landlord’s lender. If agreeable to a landlord, the LOI should be specific on the parties’ obligations, deadlines and any termination rights.
2. Permitted Use and Exclusive Use Language. Most standard leases limit the permitted use of a premises. A well drafted LOI will state any use limits and include all desired tenant uses including the types of food, beverages, merchandise or services to be sold or provided, or business to be conducted. If an exclusive use right is important to a tenant, it should be clearly stated in the LOI. Also consider addressing the remedy for landlord’s breach of the exclusive use provision. An exclusive use clause without an adequate remedy (or the very limited remedies typically available to a tenant in a standard lease) is not much of a right.
3. Lien Against Tenant’s FF&E. In order to secure a tenant’s lease obligations, landlords have a statutory lien against a tenant’s personal property brought onto the premises. A typical landlord lease also requires a tenant to give landlord a contractual security interest and Uniform Commercial Code lien against the tenant’s property. For tenants that need a loan to fund their business start up costs (especially those in the restaurant business or requiring large equipment purchases), they will likely need to give their lender a security interest and UCC-1 lien against their personal property. To grant such a lien, a landlord must waive or subordinate its statutory and/or contractual lien. Every LOI should clearly spell out what lien rights and obligations are expected.
4. Termination Rights. Landlords and their lenders loath termination rights in a lease and typically limit a tenant’s right to terminate to situations following damage or condemnation of the premises or surrounding areas. Early termination rights for matters such as co-tenancy requirements and landlord defaults should be addressed in a LOI if important to a tenant.
5. Caps on Additional Rent. If a tenant is required to pay a share of common area charges, include any agreed upon cap on initial common area charges or subsequent yearly increases.
6. Assignment of the Lease. Provide terms related to the standard of review for assignments (e.g., sole discretion, reasonable standard, net worth requirements of assignee) and whether a tenant will be released from liability following the assignment. Also address whether a release will be immediate or at the end of the current term. Landlords should make sure liability arising from prior acts or omissions is not terminated.
7. Guaranty. Be clear in the LOI as to who must provide a Guaranty and if financial statements have been approved or must be submitted for approval. Landlords should be clear on who the tenant is. If the Tenant is a corporation or limited liability company, consider whether it is a single asset entity or has other assets and liabilities in deciding on whether a Guaranty will be required.
8. Limits on Guarantees. For tenants and their guarantors, address whether a Guaranty terminates after a set time if no tenant default occurs (e.g., after initial term, after 3 years, etc.) or after the tenant has provided evidence that it has net income from business operations at the premises for a set period (e.g., for 3 consecutive lease years). Also address whether a Guaranty remains effective following an assignment of the lease and if so, whether it extends to any extension period of the term or just the unexpired portion of the current term.
9. Condition of Premises and Warranties. If landlord is not doing any work, address whether the tenant will be taking the space as-is, or with a full or partial warranty (e.g., limited 120 day warranty on HVAC, plumbing and electric). If landlord is doing work, address whether all or part of the work or premises will be warranted for a set time (e.g., 1 year after delivery) and whether warranties are being assigned to the tenant. If landlord or tenant are doing work, specific deliveries should be required to evidence completion, e.g., C of O, certificate of completion from general contractor or architect, lien waivers, etc.
If you need to speak to an Arizona attorney, contact the attorneys at McCain & Bursh, PLC. www.mccain-bursh.com.