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

PASSTHROUGHSCAM, real estate taxes and insurance

and sometimes utilities

PASSTHROUGHSCommon 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 TerminationWhen 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 TerminationTypical early termination scenarios1. Gross sales kickout (repay unamortized

TI)2. Negotiated buy-out3. No operating covenant4. Landlord breach of special covenant

1. Exclusive2. Co-tenancy

USE - PermittedLandlord• 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 – ExclusivesLandlord Concerns1. Narrowly defined – more focused than

permitted use2. Restricted to tenant’s core business3. Permit incidental sale of restricted items4. Geographically limited – to building or

center at most; bookstores/groceries

USE - ExclusivesTenant Concerns1. Wants broadest definition possible,

including ancillary goods2. Largest geographic reach possible – 2

miles?3. Real remedy for violation

USE - ExclusivesCarve-outs1. Anchors2. Existing tenants – but may bind LL where

LL has consent rights over change in use3. Incidental uses4. Anticipated tenants – problematic, and

can be remedied with later waiver

USE – ExclusivesTermination of RightProtection intended for tenant’s core

business; need for protection may go away

• Assignment/Sublease• Change in use• Failure to continuously operate• Default

USE – ExclusivesRemediesCure periodAfter some period of time, substitute rent – 5%

gross; ½ minimum rentAfter further period - termination

USE – ExclusivesLandlord 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 - RadiusLandlord protection

Flip side of exclusiveProhibits tenant from competing with landlord’s center5 miles – negotiate down – have seen 10

milesRemedy – add in Gross Sales

Assignment and SublettingAssignment 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 SublettingSubleaseWhere 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 SublettingCommon 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-tenancyTenant’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-tenancyRemedies for violation

– Cure period– Alternative rent for some period of time– Termination– Repayment of out-of-pockets?