First, let me explain what a Letter of Intent (LOI) is and why it’s important. Essentially, it’s a commitment letter and negotiating tool for the benefit of the principal parties of a proposed transaction, such as a lease agreement or purchase contract. It’s used when the principals are ready to commence negotiations in earnest, but as a preliminary step prior to negotiating a full contract or agreement. The LOI, which is generally non-binding except for certain provisions i.e. confidentiality, exclusivity, etc., is intended to reach an agreement on the key terms or provisions of the transaction. With regards to a lease agreement, which is often 30 to 50 pages in length, the LOI usually only consists of one to two pages and includes important factual information, i.e. the parties involved, details about the subject property, etc., as well as five to ten key terms or provisions to be negotiated, such as the prospective tenant’s permitted use, lease commencement date, term length, rental rate, tenant improvement allowance, or other important financial and non-financial concessions, etc. Think of these key terms or provisions as the likely deal breakers if the principals don’t come to an agreement. And that’s the benefit of an LOI…if these five to ten key terms or provisions can’t be agreed upon, there’s no reason to spend precious time and money, i.e. attorney fees, etc., trying to negotiate a full contract or agreement when the really important terms and provisions put the transaction in jeopardy.
5 Mistakes When Negotiating an LOI for Your Dental Office Lease or Purchase
The following are 5 mistakes often made when negotiating an LOI for your dental office lease or purchase. I will list them here and then expound on each one below. They are:
- Submitting an LOI that is too long, trying to negotiate too many provisions.
- Not including an exclusive negotiation provision.
- Not including a deadline or expiration date for the counterparty to respond.
- Not including a confidentiality provision.
- Not requiring both parties to sign the final LOI.
- BONUS: The virtue of the “Best and Final Offer.”
- Submitting an LOI that is too long, trying to negotiate too many provisions. Not everything is a deal breaker. Trying to negotiate too many terms or provisions when submitting an LOI can be discouraging to the counterparty, especially terms that really should be addressed by the attorneys. Negotiating an LOI should be relatively straightforward, in part, because there are no legal provisions to negotiate. If Sellers and Landlords think things are difficult in the beginning, they’ll think things will be difficult throughout. LOIs longer than 3 or 4 pages also take longer to negotiate. What should take a week or two to finalize, could take a month or longer and time is almost never a friend when negotiating a transaction. So, if more than 5 or 10 terms or provisions in any transaction are deal breakers then there’s very little chance of a successful outcome. It may be a sign to move on before getting started. Keeping the LOI to 4 pages or less will allow the parties to home in on the important things and keep the process moving at a productive pace.
- Not including an exclusive negotiation provision. In short, this is a provision that prohibits one party, in this case, the Seller or Landlord, from soliciting offers or entering into negotiations with 3rd parties during a specified time period. I prefer for the exclusive negotiation period to extend up to an executed lease agreement or purchase contract, as long as negotiations for the subject property are actively taking place. This protects the Buyer or Tenant from the Seller or Landlord accepting a 3rd party offer that is more attractive or favorable, especially late when the Buyer or Tenant has incurred costs related to legal services, due diligence, etc., or when time and money to conduct a new search for suitable space could place the Buyer or Tenant in a real bind. There have been many instances when a prospective tenant is negotiating terms for lease space and at the last second, a national credit business, i.e. Verizon, who wants the same space, or a large business who wants to lease the entire building, swoops in and gets a deal done, thus forcing the prospective tenant to look elsewhere. And who could blame the Landlord for making that deal?
- Not including a deadline or expiration date for the counterparty to respond. As mentioned before, time is almost never a friend when negotiating a transaction. An effective method to mitigate that issue is to include deadlines or expiration dates for the counterparty to respond or reply to offers or counteroffers. I don’t recommend using deadlines or expiration dates as a hardline sales tactic, it doesn’t work. Most parties don’t respond well to that kind of pressure. However, deadlines and expiration dates are critical for the parties to respect the process and the need for timeliness to keep the process moving. Remember, the LOI is a very effective way to quickly determine if a deal can be done. Wouldn’t we all want to know sooner than later if it can’t? So here are two tips when using deadlines or expiration dates…first, don’t be stingy with the time for the counterparty to respond, or too generous. Requiring a reply in 24 hours is often unreasonable and giving them 10 days will make the LOI process too long. When considering the initial offer I think about the number of rounds the parties may need to go back and forth to come to terms. If the initial offer is near the asking terms, maybe it’s two or three rounds. If the initial offer is significantly lower than the asking terms, it may take a few more rounds to close the gap. I suggest three or four days, and when there are one or two remaining items to finalize the LOI, a day or two is reasonable. Secondly, it’s perfectly acceptable to offer and/or gladly extend the deadline or expiration date if the counterparty needs more time. Remember, this isn’t a sales tactic, but an important tool to keep the process moving. Without it, parties are waiting indefinitely for a response, and when it doesn’t come it requires more and more follow-up, which can often seem pushy. When including a deadline or expiration date be sure to include something about the time, such as “by end of business” or a specific time, i.e. 5:00 pm.
- Not including a confidentiality provision. Including a confidentiality provision or non-disclosure agreement, is important to limit the written or verbal disclosure of, and protect, the named parties involved, trade secrets, and sensitive information that is provided to the respective parties. For example, an associate dentist submitting an LOI for lease space to start their own practice may not have disclosed to their current employer their intent to leave. The dental community is small…think six degrees of separation (or six degrees of Kevin Bacon if you’re so inclined), where the Landlord seeks counsel about the deal from a friend or advisor, who then innocently mentions it to someone else, and so on, until it gets back to the employer, putting the associate dentist in a potentially awkward position. Or, it’s not uncommon to submit the Tenant’s financial information to the Landlord while a lease LOI is being negotiated. The financial strength and creditworthiness of the Tenant plays a role in the Landlord’s willingness to agree to certain lease terms that could increase the Landlord’s risk or potential liability. Limiting the disclosure or sharing of the Tenant’s financial information is important to preserve the Tenant’s privacy or protect the Tenant from nefarious situations such as identity theft. I’m generally okay with the principal parties disclosing information to 3rd parties who are directly assisting the principal parties with the transaction. Those typically include professionals such as attorneys, CPAs, bankers, etc. However, the principal parties shall be responsible for communicating the need for 3rd parties to also comply with the confidentiality provision.
- Not requiring both parties to sign the final LOI. So you’ve done a good job and all the provisions in the LOI are agreed to and you’re ready to begin reviewing and negotiating the lease agreement or purchase contract. But you neglected one small detail, to have both parties sign the final LOI. It happens quite regularly, and like most, you may be thinking signatures aren’t really necessary because the LOI isn’t binding anyway. I can attest that signatures on a final LOI still have a lot of power. I’ve encountered many circumstances in which a Seller or Landlord tried to change, oftentimes quite slyly, a term or provision in the lease agreement or purchase contract that was agreed to in the LOI. And although the LOI isn’t binding, when the Seller or Landlord is presented with the LOI they agreed to, and put their signature to, virtually every time they change the terms back to the terms in the LOI. Without a signed LOI there’s really no way to say for sure what was agreed to, and therefore leaves the lease agreement or purchase contract subject to renegotiation.
- BONUS: The virtue of the “Best and Final Offer.” Sometimes negotiations reach a point where things slow down, usually when negotiating the last few remaining items. Maybe one party just can’t seem to make up their mind and won’t commit. Or, one party is pushing certain terms that just won’t work for the counterparty, but the one party won’t relent. You’re in negotiating limbo and if you’re not careful you could remain there for a lot longer than you intended. That’s because it’s hard to walk away when you really don’t have an answer. And no answer feels better than getting No for an answer. We’re driven to keep the deal alive, hoping the counterparty will come around, even though there’s an uncanny similarity between being in limbo and getting No for an answer. So, have the courage to get your answer, and all you have to do is submit your “Best and Final Offer,” with a deadline of course. There really is something magical about that phrase. It knocks people off dead center and compels a response. Trust me, no matter the answer you are far better off. If it’s a No, now you know where you stand and prepare to move on. Or you may get a Yes, and a Yes after a Best and Final Offer is just a little bit sweeter.
This article was written by Robert C. Armstrong, CCIM, CFP®, CIPS, LEED AP®, Principal at RCA Global.
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