Importance of Negotiating the Letter of Intent for Health Care Leases

In our ongoing series of blog posts, we have examined key negotiating points for tenants in triple net health care leases.

We also have offered suggestions for certain lease provisions designed to protect tenants from overreaching and unfair expenses, overly burdensome obligations, and ambiguous terms with respect to the rights and responsibilities of the parties. These suggestions are intended to result in efficient lease negotiations and favorable lease terms from a tenant’s perspective. In our previous blog posts, we considered the importance of negotiating initial terms and renewal terms, operating expense provisions, assignment and subletting terms, maintenance and repair obligations, holdover provisions and surrender terms, tenant improvement allowances, exclusivity, expansion and relocation provisions, and default provisions. This final blog post in our series focuses on negotiating the letter of intent.  

While a letter of intent (“LOI”) is usually non-binding, it is an extremely important part of the lease process and a valuable tool to make expectations clear and prevent time consuming and costly back and forth during lease negotiations. The topics covered in our earlier blog posts in this series should be addressed in the LOI, which should serve as a road map for the parties and counsel in drafting and negotiating the lease. By agreeing on these basic terms up front, the parties will significantly reduce the amount of back and forth needed to arrive at a lease both parties find acceptable.

• Initial Terms and Renewal Terms: The LOI should detail the length of the original lease term, the number and length of any renewal terms, the required notice period for a tenant to exercise a renewal term, and how base rent will be determined during renewal terms (i.e., a baseball arbitration process to determine FMV whereby both parties hire appraisers to settle on a FMV rental amount or a set amount or increase).
• Operating Expenses: The LOI should detail any cap on controllable operating expenses, customary exclusions from operating expenses, any cap on management fees that are passed through to tenant, a tenant audit right, a sunset provision requiring landlord to invoice tenant for any additional rent within a certain period of time, and amortization of any capital improvements included in Operating Expenses.
• Assignment and Subletting: The LOI should expressly state any carve-outs from the requirement that landlord consent is required for assignments and subleases. It should also set out any landlord criteria for consent, any landlord review fees, landlord recapture rights, and any excess profit sharing.
• Maintenance and Repairs Obligations: Obligations of the parties should be included in the LOI, including responsibility for repairs and replacements and any cap on tenant’s obligations.
• Holdover and Surrender: The holdover rate, any grace period, and any tenant obligation beyond the holdover rental rate should be included. The parties should also address whether tenant improvements must be removed at the expiration of the lease term.
• Tenant Improvement Allowances: If any tenant improvements are to be constructed, responsibility for the work, any improvement allowance and the disbursement process, time periods for submission and approval of plans, estimated completion times and recourse for delays should be addressed.
• Exclusivity, Expansion, and Relocation: Any tenant exclusive and the remedy for violation should be included in the LOI. If tenant has an expansion right, the expansion space and manner of exercise of the right should be addressed. If landlord has the right to relocate tenant, the parameters of the right should be set forth in detail, including responsibility for costs and any limitations on the exercise of the right. If there is no relocation right, the LOI should specify same.
• Default: Notice and cure period should be agreed upon in advance, as well as any obligation of landlord to mitigate damages.

Other provisions the landlord and tenant should address in the LOI include: the permitted use, the square footage and description of the premises, any prohibited uses or restrictions, parking rights and costs, signage rights and costs. Phrases in the LOI such as “to be detailed in the lease” or “language to be included in the lease” are not helpful, and the parties should seek to include enough detail in the LOI so as to avoid disagreement on key terms when it comes to negotiation of the form of lease.

Allison Zangrilli and Zlata Fayer are Senior Counsel in Epstein Becker Green, P.C.’s Health Care and Life Sciences Group. Allison and Zlata have extensive experience drafting and negotiating commercial leases for clients in a wide variety of industries, including healthcare, hospitality, real estate and professional services. They focus on medical office, retail and warehouse space leases. They are also experienced in all aspects of real estate matters, including real estate acquisitions and dispositions, title matters, diligence, and financing.