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LEASINGThe Letter of Intent
Presented by:
Sean P. Callan
The Letter of Intent
• Non-binding outline of fundamental economic terms of lease
• Varying degrees of detail for varying business reasons
• Important to us because they are the basis for drafting the lease.
The Letter of Intent
• Rent, term, space, renewals …..
• Some items not discussed – may be intentional or unintentional
• Thoughts ….. Not directions but things to think about when drafting LOI
AGENDA1. Continuous Use/Operating Covenant
2. Passthroughs
3. Early Termination
4. Use, Exclusives and Radius
5. Assignment and Subletting
6. Construction and Commencement
7. Co-tenancy
Continuous Use/Operating Covenant
How critical is it?
Retail
Office
Industrial
Continuous Use/Operating Covenant
If not mentioned in the LOI, is the Tenant required to continuously operate?
Landlord – of course – part of standard lease form!!!
Tenant – of course not – its not in the LOI!!!
Continuous Use/Operating Covenant
• The “one day” compromise• Exceptions – legal holidays, remodeling,
closures due to casualty/condemnation and inventory
• Remedies • With covenant – standard lease remedies• With no covenant – must be negotiated –
recapture in shortest time possible• On recapture – tenant may demand unamortized
improvements and expenses
PASSTHROUGHS
CAM, real estate taxes and insurance
and sometimes utilities
PASSTHROUGHS
Common Issues• GLA/GLOA• Audit• Cap
– Cumulative – add 5% every year– Non-cumulative – 5% over actual
• Carve-outs• Anchors – cannot be included in denominator• Outlots• Base year/gross up
Early Termination
When the lease ends prior to natural expiration of term …
Huge issue for Landlord- changes pro-forma cash flow
Huge issue for Landlord lenders- lenders limit early termination rights
Early Termination
Typical early termination scenarios
1. Gross sales kickout (repay unamortized TI)
2. Negotiated buy-out
3. No operating covenant
4. Landlord breach of special covenant1. Exclusive
2. Co-tenancy
USE - Permitted
Landlord• Specific• Narrow – at least restrict to national
operations• Trade name• No change without consent
Tenant• Broad• Any lawful use• No specific trade name• Free to change use or trade name• Free right to change within corp. umbrella
USE – Exclusives
Landlord Concerns
1. Narrowly defined – more focused than permitted use
2. Restricted to tenant’s core business
3. Permit incidental sale of restricted items
4. Geographically limited – to building or center at most; bookstores/groceries
USE - Exclusives
Tenant Concerns
1. Wants broadest definition possible, including ancillary goods
2. Largest geographic reach possible – 2 miles?
3. Real remedy for violation
USE - Exclusives
Carve-outs
1. Anchors
2. Existing tenants – but may bind LL where LL has consent rights over change in use
3. Incidental uses
4. Anticipated tenants – problematic, and can be remedied with later waiver
USE – Exclusives
Termination of Right
Protection intended for tenant’s core business; need for protection may go away
• Assignment/Sublease• Change in use• Failure to continuously operate• Default
USE – Exclusives
RemediesCure period
After some period of time, substitute rent – 5% gross; ½ minimum rent
After further period - termination
USE – Exclusives
Landlord Concerns – Remedies• Longest cure period possible• Longest alternative rent period possible• tie remedies to demonstrated harm; i.e.,
decrease in sales• No remedy if another tenant violates its
lease• Restraint of trade/antitrust – ask for tenant
indemnification
USE - Radius
Landlord protection
Flip side of exclusive
Prohibits tenant from competing with landlord’s center
5 miles – negotiate down – have seen 10 miles
Remedy – add in Gross Sales
Assignment and Subletting
Assignment of LeaseAn assignment (i.e., the transfer of rights or
property) in which a lessee transfers the entire unexpired remainder of the lease term
or
All of the space for the rest of the term
Assignment and Subletting
Sublease
Where a lessee transfers a part of its premises for the whole remaining term, or the whole premises for a part of the remaining term
or
Some of the space for the whole term, or all of the space for less than term
Assignment and Subletting
• Assignment – new tenant primarily liable to LL; old tenant a guarantor
• Sublease – LL has no relationship to subtenant – original tenant wholly liable to LL
• Each are permitted unless lease says otherwise
• “not to be unreasonable withheld” vs. LL’s “sole discretion”
Assignment and Subletting
Common scenarios• In connection with sale or merger
– Involves x number of stores– X$ net worth, or exceeds T’s net worth at time
of lease and time of assignment
Construction and Commencement
Work Letter• Allocates responsibility for build-out – should be as clear
as possible; should be reviewed/approved by construction manager– Pad delivery – outlots – Landlord provides buildable pad and
utility stubs to lease line of pad– Cold dark shell – Landlord provides structure, utility stubs and
pad; all other work is tenant’s including strorefront and slab– White box – space is drywall taped, sanded and ready to paint;
tenant finish– Turnkey – Landlord does all work
Construction and Commencement
Tenant FinishInstalled in a good and workmanlike manner
In accordance with applicable law
Design should reflect tenant’s prototypical store
In accordance with plans and specs reviewed and approved by Landlord
Design, plans and specs need to be finalized as soon as possible in the build-out process – Critical point! Cost & timing implications
Construction and Commencement
Commencement• Tied to delivery – give tenant time to
complete finish• Pad delivery – 180 – 240 days• Cold dark shell – 90 – 150 days• White Box – 30 – 60 days• Turnkey – no more than 30 days
Construction and Commencement
Commencement – When does the clock start?
• Landlord plan approval• Tenant failure to draw good plans
– Do not comply with law– Not proto-typical store/office– Special needs– Do not comply with preliminary plans
• Permits– Tenant should apply by date certain and diligently pursue– Same with liquor and business licenses
Construction and Commencement
Commencement – late delivery– Potentially huge issue for tenant– Penalties– Termination if not delivered by outside date– Force majeure– Tenant delays
Co-tenancy
Tenant’s obligations under lease are conditioned upon the continued presence and operation of another entity at a certain location
• Retail – other tenants in shopping center– Named tenants – reasonable replacements– Percentage of center – what about anchors and
premises?– Shadow anchors
• Office/industrial – tied to presence of client or customer
Co-tenancy
Remedies for violation– Cure period– Alternative rent for some period of time– Termination– Repayment of out-of-pockets?