Streamlining relocation and expansion negotiations
A letter of intent can prevent many headaches
A letter of intent is an important step in negotiating a corporate relocation or expansion.
By Scott D. Brooks and Robert J. Sykes
After an exhaustive search, you’ve found the ideal site for your corporate relocation or expansion. Should you immediately have your attorney draft a proposed lease or purchase agreement? Probably not. It makes sense to first draft a so-called “letter of intent” to determine whether or not agreement can be reached on the basic business terms of the transaction with the seller/lessor — before you spend time and attorneys’ fees negotiating other provisions ultimately included in the more formal agreement.
By resolving the more significant issues at the outset, the letter of intent can save time in negotiating the formal purchase agreement or lease of your company’s new facility. A letter of intent can also reduce attorneys’ time, and therefore fees, by providing your legal counsel with a “road map” for documenting the transaction. This also frees you from involvement in the negotiation of the “legalese”.
Typically, neither party to a letter of intent desires to be bound until final resolution of the myriad business and legal issues is completed. To avoid having your letter of intent misconstrued as binding upon the parties, include a simple disclaimer in the letter of intent, such as the following:
This letter of intent shall not be binding upon the parties. A binding agreement shall not exist between the parties until a lease has been executed and delivered by both parties.
This simple disclaimer, however, may not be effective if the parties’ conduct indicates the intention that the letter of intent be binding. Consequently, all correspondence to the seller or lessee should clearly state that the letter of intent shall not be binding upon the parties.
Level of detail
When negotiating a letter of intent, a careful balance must struck between the somewhat conflicting goals of this document: on the one hand, a desire to expeditiously reach agreement on fundamental business issues in order to provide a “road map” for further negotiation of the full agreement, and, on the other hand, a desire to resolve all possible areas of contention to ensure that the deal will actually be done once the letter of intent is signed. The more detail included in the letter of intent, the further the letter strays from its original value. Yet a letter of intent that lacks specificity or fails to address key issues may frustrate the purpose of using the letter in the first place — it leaves too many issues to be resolved during final negotiations, increasing overall negotiating time and legal fees. Moreover, in leaving out too much detail, you risk losing the deal during formal document negotiation process when failure to reach agreement with the seller/lessor on important issues can ultimately derail the entire transaction.
Important letter of intent provisions
The following information summarizes several key issues which should be considered when negotiating letters of intent for corporate relocations or expansions. Except for certain required elements necessary to outline the basic business agreement (e.g., description of parties, property, price, etc.), the extent to which some of these issues should be addressed at the letter of intent stage will depend on the specific circumstances of the transaction.
Letters of intent in purchase and sale transactions
– Property description — Include legal description, street address and/or depiction of the property to clearly identify the property.
– Purchase price — Include the basis for any adjustment in the purchase price (e.g., actual gross land area).
– Deposit — Include amounts, timing for deposit by buyer and release to seller, refundability, and applicability to purchase price.
– Due diligence period — Include duration and standard for buyer’s review and approval of the property.
– Closing date — Include any rights of extension.
– Closing conditions — Typical closing conditions may include (i) the absence of a default or breach of representations by the other party, and (ii) that there be a commitment for financing and/or issuance of the title policy.
– Representations and warranties — Consider whether to include specific representations to be addressed in the final agreement (e.g., hazardous materials, compliance with laws) or a more general statement that customary representations will be provided and the applicable seller’s “knowledge” standard (e.g., best knowledge, actual knowledge) which will apply. If applicable, specify whether the sale is to be on an “as is” basis.
– Brokers — Specify known brokers and allocation of responsibility for payment of commissions.
– Closing costs — Allocate responsibility for escrow and title fees, recording costs and county (and city, if applicable) transfer taxes.
– Letters of Intent in Lease Transactions
– Premises — Include a description of the location and approximate square footage of the premises. In office leasing, consider specifying the manner of calculating “rentable area” compared with “usable area”.
– Lease term — Specify initial term and any options to extend.
– Term and Rental Commencement Date – Specify any “build out” or rent abatement period and any conditions to rent payment.
– Rent — Specify minimum rent and any additional rent obligations. Consider including limits on tenant’s share of common area maintenance, tax and insurance expenses.
– Security deposit; Guarantee — Indicate the amount of security deposit and whether any personal guarantees are required.
– Use – Obtain the lessor’s consent to tenant’s use, if unusual.
– Construction of premises — Describe in summary form the landlord’s and tenant’s individual responsibilities for the construction of the premises.
– Assignment and subletting — Include any limitations upon assignment and subletting. Consider whether there is to be any release of tenant upon assignment (which is generally not the case in commercial leasing).
– Maintenance of premises — Clarify whether landlord or tenant will maintain and repair the building structure, roof, exterior, utility systems and heating and air conditioning equipment.
– Signs — Include tenants’ rights to building, monument and/or pylon signage.
Use of a letter of intent is an important and valuable step in the process of negotiating a corporate relocation or expansion. Although there are risks of misinterpretation inherent in the use of a simplified summary of a transaction, these are generally outweighed by the benefits of assisting the parties in working toward a final agreement.
Scott D. Brooks and Robert J. Sykes are attorneys with the law firm of Cox, Castle & Nicholson, LLP, which has offices in Los Angeles, Irvine and San Francisco and specializes in providing comprehensive legal services to the real estate and construction industries. Copyright Cox, Castle & Nicholson, LLP.