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LEASING The Letter of Intent

This article discusses the importance of the Letter of Intent (LOI) in leasing agreements, including fundamental economic terms of lease and considerations for drafting the LOI. Topics covered include continuous use/operating covenant, passthroughs, early termination, use exclusives and radius, and assignment and subletting.

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LEASING The Letter of Intent

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  1. LEASINGThe Letter of Intent Presented by: Sean P. Callan

  2. 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.

  3. 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

  4. AGENDA • Continuous Use/Operating Covenant • Passthroughs 3. Early Termination 4. Use, Exclusives and Radius 5. Assignment and Subletting • Construction and Commencement • Co-tenancy

  5. Continuous Use/Operating Covenant How critical is it? Retail Office Industrial

  6. 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!!!

  7. 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

  8. CAM, real estate taxes and insurance and sometimes utilities PASSTHROUGHS

  9. 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

  10. 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

  11. Early Termination Typical early termination scenarios • Gross sales kickout (repay unamortized TI) • Negotiated buy-out • No operating covenant • Landlord breach of special covenant • Exclusive • Co-tenancy

  12. 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 - Permitted

  13. USE – Exclusives Landlord Concerns • Narrowly defined – more focused than permitted use • Restricted to tenant’s core business • Permit incidental sale of restricted items • Geographically limited – to building or center at most; bookstores/groceries

  14. USE - Exclusives Tenant Concerns • Wants broadest definition possible, including ancillary goods • Largest geographic reach possible – 2 miles? • Real remedy for violation

  15. USE - Exclusives Carve-outs • Anchors • Existing tenants – but may bind LL where LL has consent rights over change in use • Incidental uses • Anticipated tenants – problematic, and can be remedied with later waiver

  16. 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

  17. USE – Exclusives Remedies Cure period After some period of time, substitute rent – 5% gross; ½ minimum rent After further period - termination

  18. 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

  19. 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

  20. Assignment and Subletting Assignment of Lease An 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

  21. 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

  22. 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”

  23. 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

  24. 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

  25. Construction and Commencement Tenant Finish Installed 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

  26. 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

  27. 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

  28. Construction and Commencement Commencement – late delivery • Potentially huge issue for tenant • Penalties • Termination if not delivered by outside date • Force majeure • Tenant delays

  29. 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

  30. Co-tenancy Remedies for violation • Cure period • Alternative rent for some period of time • Termination • Repayment of out-of-pockets?

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