What Belongs in a Sale-Leaseback Letter of Intent

A letter of intent, or LOI, is often just a few pages. One law firm describes it as a roadmap for the transaction, and mistakes or vague terms in it can carry through to the final documents. For a seller, there is an extra reason to take it seriously. You have the most leverage while buyers are competing, and you often give that up when you sign. Anything left open at signing will be negotiated later, with one buyer, under time pressure.

An ordinary property sale LOI covers the sale. A sale-leaseback LOI should cover two deals: the sale and the lease. Our guide on the path from LOI to closing explains what happens next. This guide is about what to put in the document.

• Purchase price. State the number, and say what it assumes. If it depends on the rent, or on a survey or appraisal, say so.
• Property and parties. Identify the buyer entity, the seller entity and the property, including any land, equipment or fixtures in or out of the deal. Equipment that stays yours should be named as yours.
• Buyer's source of funds. Say whether the purchase depends on financing, and if so, name the contingency and its deadline.
• Diligence period. Say how long, and when the clock starts. Illinois attorneys at Gould + Ratner point out that a "30-day due diligence period" means little without a defined start date. List what you will deliver, and by when.
• Deposit. State the amount, when it is paid, who holds it, and when it becomes non-refundable. The date it goes non-refundable is one of the clearest signals of a buyer's conviction.
• Closing date. State the target and any right to extend.
• Closing costs and brokers. Local custom varies. Gould + Ratner notes that in Illinois the seller usually pays for the base owner's title policy, that Cook County tax prorations need care because taxes are paid in arrears, and that in Chicago both buyer and seller pay a transfer tax. Identify the brokers and who pays them.
• As-is language. Boilerplate on this can reach further than it first appears. It should be clear that representations and environmental matters will be handled in the purchase agreement.

This is where a sale-leaseback LOI differs most, and where a seller can leave value on the table. A buyer that agrees to a term in the LOI, while competing with others, is much less likely to reopen it. As one law firm puts it about portfolio deals, the flexibility framework should be set at the term sheet stage.

• Base rent. State the first-year amount and when it starts.
• Initial term. State the years, and how that matches the time you actually need the site.
• Renewal options. State how many, how long, how renewal rent is determined, and the notice deadlines.
• Escalations. State fixed steps or an index and any cap and floor. Attach a rent schedule, so that no one is surprised by the rent in the later years.
• Net lease scope. Say who pays for the roof, structure, parking, HVAC, capital replacements and code compliance. A few short clauses here can decide who carries large future costs.
• Credit support. State whether any guaranty is corporate, parent or personal, how long it lasts, and when it can be released. Do not leave this blank.
• Assignment and change of control. Say what you can do without landlord consent, including a sale of the company.
• Permitted use and alterations. Ask for a broad use clause, categories of pre-approved alterations, and a time limit on landlord response.
• Financial reporting. State what you will report and how often, and how it will be kept confidential.
• Surrender condition. State what condition you must return the building in, and whether you may remove your equipment.
• Lender protection. If the buyer will have a lender, ask for a non-disturbance agreement in a reasonable form, which is intended to protect your lease if the lender of the landlord forecloses.
• Repurchase rights, if you want any. Raise them now, since a repurchase right can change who is interested, and most repurchase options can keep the transaction from being accounted for as a sale. Have your CPA review this before proposing it.

Attach a one-page lease term sheet to the LOI. It is easier to negotiate 12 terms now, while buyers are competing, than to fight about them in a first draft that the buyer's attorney wrote after you signed exclusivity.

Exclusivity means you agree not to market the property or talk with other buyers for a period. It is usually the most valuable thing a seller gives in an LOI, and buyers are advised to make it a binding term. Treat it as something you sell.

• ✓Is the period short, with a firm end date and no automatic extension?
• ✓Does exclusivity end if the buyer proposes a lower price or materially changed terms?
• ✓Have we reached agreement on the lease term sheet before granting it?
• ✓Must the buyer sign a purchase agreement or deliver a draft by a specified date?
• ✓Does the buyer have to meet diligence milestones to keep it?
• ✓Do we know what remedy applies if either side breaches?
• ✓Has the person signing on each side been confirmed to have authority?

You may also want confidentiality terms in the LOI, particularly if your employees, customers or lender do not yet know about the transaction.

Many sellers assume an LOI commits no one to anything. That can be wrong, in both directions. Parties often intend the purchase obligation to be non-binding until a purchase agreement is signed, while confidentiality, exclusivity, access and brokerage provisions bind immediately. The document should say so, and should specify what happens if a binding term is breached.

Whether a court would treat an LOI as binding depends on its wording and the circumstances. A Much Shelist article describes factors courts weigh: disclaimers, whether earnest money or diligence begins before a final contract, and whether customary material terms are missing. A disclaimer alone may not settle it if the whole document shows the parties meant it as a final deal.

For Illinois, a 2019 article by a Chicago litigator explains that substantive terms in a real estate LOI are enforceable only if it contains the essential elements of a real estate contract, satisfies the statute of frauds where the interest lasts over a year, and shows objective intent to be bound. Language making the deal subject to a formal agreement generally defeats enforcement of the substantive terms. Separately, an LOI that is not binding as to the deal can still create a duty to keep negotiating, sometimes in good faith, which may limit your ability to back away from terms already agreed. Have your attorney review the LOI before you sign, including the wording on good faith.

1. Before asking for offers, decide your must-have lease terms and the rent your business can carry.
2. Send buyers a term sheet to respond to, so the offers can be compared on the same basis.
3. Compare responses on price, rent and lease terms together, and vet the finalists.
4. Use the competition to settle remaining lease terms before granting exclusivity.
5. Have your attorney review the final LOI, and your CPA review any term that could affect sale treatment.
6. Sign, then start the diligence clock with your documents ready to go.

At TAG, we negotiate the price and the lease as one package on behalf of the seller who becomes the tenant, and the LOI is where that package begins.