Presenting a live 90-minute webinar with interactive Q&A. Today s faculty features:

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1 Presenting a live 90-minute webinar with interactive Q&A Real Estate Leasing Letters of Intent: Obtaining Favorable Terms and Avoiding Protracted Negotiations Structuring Effective LOIs and Minimizing Enforceability Pitfalls THURSDAY, FEBRUARY 12, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Manuel Fishman, Shareholder, Buchalter Nemer, San Francisco Sujata Yalamanchili, Partner, Hodgson Russ, New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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4 REAL ESTATE LEASING LETTERS OF INTENT: OBTAINING FAVORABLE TERMS AND AVOIDING PROTRACTED NEGOTIATIONS By Sujata Yalamanchili, Esq.

5 I. ADVANTAGES OF USING LETTERS OF INTENT IN LEASE TRANSACTIONS Creating a meeting of the minds A letter of intent or term sheet allows the parties to confirm there is a meeting of the minds on key business terms before investing the time and expense of negotiating lease documents. RFPs. Some sophisticated tenants require landlords to provide term sheets as part of a comprehensive RFP process, allowing the tenant to compare deals from various landlords side by side. Institutional Landlords often, a letter of intent is required before outside counsel will be authorized to begin preparing the lease. 2 5

6 I. ADVANTAGES OF USING LETTERS OF INTENT IN LEASE TRANSACTIONS Uniformity Some large tenants with many locations (e.g. a retail tenant) might want uniformity of deals among locations throughout the country. Using a letter of intent allows them to conform multiple deals with different brokers and different landlords, using a uniform format. Overlooking Key Issues Letters of Intent can also highlight for landlords and tenants, certain key issues they might have overlooked. Ease of Drafting and Negotiating Lease A well-crafted and well thought out letter of intent should permit the attorneys to prepare a lease in a more efficient manner and it should cut down on extensive negotiation 3 6

7 Letters of Intent Binding vs. Non-Binding Presented by Manuel Fishman

8 Binding vs. Non-Binding General rule is that the terms of a Letter of Intent are nonbinding Meaning: no intent to create a contract no implied covenant to negotiate on terms right of landlord to obtain other offers ability of either party to terminate negotiations at any time See Appendix 1 Sample Language 5

9 Binding vs. Non-Binding See Copeland v. Baskin Robbins USA 96 Cal.App 4 th 1251 (2011) Relying on Channel Home Centers vs. Grossman 795 F (3 rd Cir. 1986) When two parties, under no compulsion to do so, engage in negotiations to form or modify a contract neither party has any obligation to continue negotiating or to negotiate in good faith. Only when the parties are under a contractual compulsion to negotiate does the covenant of good faith and fair dealing attach, as it does in every contract. In the latter situation the implied covenant of good faith and fair dealing has the salutary effect of creating a disincentive for acting in bad faith in contract negotiations. We believe there are sound public policy reasons for protecting parties to a business negotiation from bad faith practices by their negotiating partners. The parties should have some assurance "their investments in time and money and effort will not be wiped out by the other party's footdragging or change of heart or taking advantage of a vulnerable position created by the negotiation." 6

10 Binding vs. Non-Binding But see GMH Associates vs. The Prudential Realty Group 2000 PA Super 59 (2000) Appellant s contention that the letter of intent in this case created a binding promise to negotiate a formal lease must fail. There is no cause of action to enforce a contract absent a mutual manifestation of assent to be bound. [Citations omitted]. The letter of intent in this case does not disclose any agreement, not even an agreement to negotiate. 7

11 Binding vs. Non-Binding Possible Binding Terms Landlord to pay for a test fit or space plan. Tenant indemnity for plans if negotiations terminate. No shop clauses (exclusive negotiations). Confidentiality provisions. Outside date for acceptance. Note: Common to see binding provisions in Purchase and Sale letters of intent 8

12 REAL ESTATE LEASING LETTERS OF INTENT: OBTAINING FAVORABLE TERMS AND AVOIDING PROTRACTED NEGOTIATIONS By Sujata Yalamanchili, Esq.

13 III. NEGOTIATING SPECIFIC TERMS OF THE L.O.I. Rent Term and Renewal Options Options (including renewals and expansion/contraction) Security Deposits Operating Expenses, including audit rights Square Footage Assignment/Subletting Build Out, Construction Allowance, Terms of Construction Use/Exclusive Use Parking and other Amenities Signage HVAC Identifying the broker 10 13

14 IV. ENFORCEABILITY OF THE L.O.I. Does a letter of intent or term sheet create a legally binding obligation? A. Generally, an LOI is not enforceable or binding, but it can be enforceable, in certain circumstances B. Traditional contract principles apply to determine if an LOI is binding C. To be valid and enforceable, the parties must have reached a final agreement on all the essential/material terms, including, but not limited to, the area to be leased, duration of the lease, and the price to be paid, without reservations of any term for future negotiation. D. Terms in the LOI are extremely important: a best practice is to include a provision in the LOI stating that the LOI does not create any legal, enforceable, and/or binding relationship between the parties 11 14

15 ENFORCEABILITY OF THE LOI Even if a binding agreement is not created, the LOI probably creates an obligation on the parties part to negotiate a transaction in good faith A. what is good faith? Neither party may engage in conduct that will injure or frustrate the rights or interests of another party to the agreement B. failing to negotiate at all and walking away simply because you get a better offer is probably bad faith C. trying to negotiate a deal but terminating the agreement when the parties can t reach agreement on key terms which weren t spelled out in the LOI is probably good faith D. a tenant was found not to have breached an implied covenant of good faith by failing to lease property, where an express condition precedent in the letter of intent required the tenant s board of directors to approve the lease and the board failed to approve the lease 12 15

16 Letters of Intent Drafting Pitfalls Presented by Manuel Fishman

17 Drafting Pitfalls Confusing Purposes A Letter of Intent is not a marketing tool. Omit references to building amenities or to first class. Over negotiating the Letter of Intent Rely on TBD 14

18 Drafting Pitfalls The danger of providing estimates in Letters of Intent See Thrifty Payless vs. The Americana at Brand 218 Cal.App 4 th 1230 (2013) Case involved a Letter of Intent that contained estimated charges for taxes, insurance and common area maintenance expenses. See article attached as Appendix III 15

19 Drafting Pitfalls Facts of the case Letter of Intent contained estimated charges Landlord s Vice President of Leasing provided a budget during lease negotiations Lease was entered into When first bill was generated, charges for CAM including taxes and insurance were 2 to 3 times higher than estimate Thrifty objected Lease contained a comprehensive integration charge 16

20 Drafting Pitfalls Holding of case Statements (i.e. the estimate) are actionable if the two elements of fraud are present: (i) negligent or intentional misrepresentation; and (ii) justifiable reliance 17

21 Drafting Pitfalls Remedial actions Estimates need to be supported by good faith Any estimate should be stamped or accompanied by a statement this [budget] is merely an estimate based on the current knowledge of landlord. The figures herein may change significantly based on unknown future events. No reliance should be made based on the figures contained herein. Landlord has no duty to update this [budget]. 18

22 Appendix I Sample language of Letter of Intent This letter/proposal is intended solely as a preliminary expression of general intentions and is to be used for discussion purposes only. The parties intent that neither shall have any contractual obligations to the other with respect to the matters referred herein unless and until a definitive agreement has been fully executed and delivered by the parties. The parties agree that this letter/proposal is not intended to create any agreement or obligation by either party to negotiate a definitive lease/purchase and sale agreement and imposes no duty whatsoever on either party to continue negotiations, including without limitation any obligation to negotiate in good faith or in any way other than at arm s length. Prior to delivery of a definitive executed agreement, and without any liability to the other party, either party may (1) propose different terms from those summarized herein, (2) enter into negotiations with other parties and/or (3) unilaterally terminate all negotiations with the other party hereto. 19

23 Appendix 2 Manny Fishman Article Estimates in Letters of Intent Can Come Back to Bite 20

24 Appendix 3 Manny Fishman Biography Manuel Fishman is a Shareholder in the firm s Real Estate Practice Group in San Francisco. Mr. Fishman focuses his practice on representing real estate developers, owners and secured lenders in the acquisition, sale and financing of commercial properties. In addition, he has an active leasing practice representing owners of several major office buildings in San Francisco, as well as tenants in lease and sublease transactions. His expertise includes letters of intent, tenant improvement work agreements, security deposits/letters of credit, signage rights, expansion and contraction rights, permitted transfers, operating expense audits and lender and master landlord recognition agreements. Mr. Fishman represents clients in equity structuring for, and the acquisition of, distressed properties and real property secured debt, including the formation of single purpose entities and joint ventures. The clients he represents invest regionally with various joint venture partners in a variety of property types, and these transactions present unique structuring and project management issues. Mr. Fishman has negotiated numerous construction management, project development and property management agreements relative to ground up development projects, as well as all types of easements and other adjoining owner agreements mfishman@buchalter.com 21