Language Does Make a Difference
Jul 11, 2005
Language Does Make a Difference
The Difference Between a Proposal and a Letter of Intent
Years ago, the president of the commercial real estate firm I was working for at the time became concerned about how his brokers were using proposals to secure space for their clients. He felt that the way that brokers casually interchanged words such as “offer,” “proposal,” and “letter of intent” caused a legal risk.
With a background in residential real estate, he was well aware that certain words could mean different things to different people. In residential real estate, the first offer is always made in a purchase contract. If both parties sign, they are in contract. However, that same practice does not exist in commercial leasing.
Most brokers—protecting their clients and creating competition among landlords for their clients’ business—submit two or three offers at one time. They always include a paragraph that stipulates that only a fully executed lease shall be binding upon both sides. This is understood as “escape” language in the event that the client chooses a different building in the end. But does the escape clause always work?
Several years ago, I represented a landlord who signed a proposal to lease space that was followed by a formal letter of intent and then the creation of a lease. The original proposal and the letter of intent included nonbinding language that was in force until a lease was signed. During the lease negotiation process, my client spent a considerable amount of money drawing up plans with architects over several meetings and countless tenant revisions. The lease was thoroughly reviewed and commented on by both sides. Eventually, a signing party was agreed to. One hour before the signing was to occur, the tenant announced that he was backing out of the deal because he had secured a different space that better suited his needs.
My client sued the proposed tenant, claiming that he had spent thousands of dollars in fees anticipating the signing of this lease. The tenant claimed that because only a fully executed lease bound the parties, he was not liable for any costs. The judge ruled in favor of my client because he stated that the case was really about reliance. The landlord was relying on the tenant to sign the lease. The tenant indicated through negotiations that he intended to close, so the landlord continued to spend money in anticipation of signing the lease.
Legally, the words “offer” and “proposal” can mean different things. Most brokers indicate that they are making an offer, not a proposal. An offer could be taken as a commitment to move forward in a transaction. A proposal indicates less obligation. A letter of intent is usually signed after both parties agree to the terms and conditions of a proposal or an offer commits both parties to good faith negotiations of a lease that will lead to a completed transaction. However, all three vehicles typically have language stating that only a fully executed lease shall be binding on both parties.
To protect yourself, if you are making multiple offers or proposals, it may be wise to state in the proposals that you as the tenant are making multiple offers or proposals or that you as the landlord are reviewing multiple offers or proposals. If you represent the tenant, it may be wise to clearly state that the tenant would have no cost or liability in the event that the lease is ultimately not signed. If you represent the landlord, you may want to state that any costs associated with lease preparation and/or architectural costs once a letter of intent has been signed could be charged back to the tenant in the event that he or she chooses to not sign the lease after all.
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Written by: Hans Hansson
Hans Hansson is President of Starboard TCN Worldwide Real Estate Services as well as a member of the Board of Directors for TCN Worldwide Real Estate. Hans has been an active broker for over 20 years in the San Francisco Bay Area and specializes in office leasing and investments. If you have any questions or comments please email firstname.lastname@example.org or call him at (415) 765-6897. You may also check out his website, http://www.commercialspacefinder.com/.