Thursday, January 19, 2012

Letter of Intent vs. Agreement to Lease

Next up in our Leasing Series…Letter of Intent vs. Agreement to Lease.

There are generally two methods by which an initial agreement is struck between a Landlord and Tenant. The first is a ‘Letter of Intent’ (LOI), and the second being an ‘Agreement to Lease’ (ATL). Although both can accomplish the same objective, there are significant differences which have implications for both parties.

The LOI is often a short summary of terms and conditions as proposed by the Tenant and forms the basis for a final lease agreement. Key items such as rental rates, square footage, deposits, possession date, landlord’s work, signage (etc.), are normally included as terms within the letter. However, there is most often a disclaimer contained in the letter which indicates something to the effect of - ‘the LOI is not binding on the parties and is pursuant to a final lease agreement’. In short it most likely has no legal weight, and depends almost exclusively on the goodwill of the parties. If used, and they are used effectively throughout the commercial leasing world, the goal should be to move to the final/executed lease agreement as quickly as possible.

Alternatively, the ATL becomes an actual contractual agreement between the parties, and generally spells out the details of the proposal in greater detail. Even though it is still subject to the signing of a final lease agreement, it will have legal consequences on the parties in the event of any sort of default. The benefits beyond the legal weight issue include - the ability to give possession prior to a final lease being signed, that the ATL can become the actual agreement on the premises (should a final lease not ultimately be agreed upon), and better justification for the time/costs of the parties involved in pursuing a deal. Generally the more complex the deal, the more an ATL makes sense.

Again, seek out experienced commercial realtors with solid leasing backgrounds in your market to assist you in the area of LOI vs. ATL.

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