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CONTRACTS AND LETTERS OF INTENT

CONTRACTS A contract may be defined as a binding agreement (not always in writing) between two or more persons or parties to perform services in exchange for some sort of consideration. For example, we could enter into a contract where I am to give you a dollar and you give me a hotdog. One key to a contract is to be certain of what you want to achieve and what each party is obligated to do. If I wanted you to cook the hot dog and serve it to me in a bun with mustard and relish, then I should make sure the contract says that, or I might find myself terribly disappointed even though you fully performed your obligation under the contract by just giving me a plain (cold) hotdog (with no bun or condiments). [In this instance, if I take you to court, I could probably prevail if I can prove that it is the custom in the market to provide a bun and condiments when selling a hot dog, but it sure is easier just to be clear in the contract.]

The primary purpose of a contract is to clarify and communicate terms and accountabilities in a specific transaction. Although many contracts may be verbal, a written contract can assure that the agreement is permanently and clearly articulated. Note: most States require that a contract with a term in excess of a year or involving consideration in excess of $500 must be in writing.

You should typically start a contract by stating all of the parties involved (their correct business names and addresses) and their intention to enter into a contract under the terms set forth therein and the date of the agreement. The contract should usually contain how long the agreement will last, terms and conditions that will apply, and exactly what goods or services and/or payment (consideration) will be required from each party. The contract must be signed by all parties. Sometimes States require that the signatures on certain documents be witnessed or signed by a notary. It is always wise to have your contract reviewed by local counsel to make sure it complies with legal requirements.

Some people think that they should not require a written contract with friends. I believe you should. A written contract may actually save a friendship, as it clarifies the agreement and no one has to rely on their memory as to what was agreed. It is funny, but most people don't have a problem honoring their agreements. It is when they think the other side is changing the deal that typically leads to problems. A clear concise writing that memorializes the agreement helps insure that there will be no misunderstandings that can undermine a friendship.

LETTERS OF INTENT Many people start out a business relationship with a "letter of intent" which is just a written statement of the intention to enter into a formal agreement under certain parameters. The purpose of the letter of intent is to set forth the basic business terms upon which you intend to enter a formal agreement, without binding yourself or the other party (parties) until you have worked out the specific details of the formal agreement - which are then set forth in an intentionally binding contract. Thus IT IS VERY IMPORTANT THAT EVERY LETTER OF INTENT INCLUDE A DISCLAIMER WHICH CLEARLY STATES THAT IT IS ONLY A LETTER OF INTENT TO CONTRACT, AND THE PARTIES DO NOT INTEND TO BE BOUND BY THE AGREEMENTS SET FORTH IN THE LETTER OF INTENT UNLESS AND UNTIL THEY ACTUALLY SIGN A MUTUALLY ACCEPTABLE CONTRACT WHICH INCORPORATES THOSE AGREEMENTS. Be careful, many people sign letter agreements which they think are only letters of intent and find that they are legally obligated. Make sure your letter of intent includes the necessary disclaimer.

A letter of intent is the basis for your contract. The letter of intent usually states the names of the parties and most of the proposed business points of the agreement and then is used by the attorneys to draft up the contract. While the letter of intent is technically non-binding, it is supposed to be a good faith effort to express the deal points between the parties, and it can cause hard feelings if one party arbitrarily changes the deal during the contract negotiations. It is usually in a buyer/tenant's advantage to address all the important business details in the letter of intent (unless they are also drafting the contract, as the drafter of the contract tends to write in their own favor). It should be noted that in many cases business points that are not addressed in the letter of intent don't get into the contract; and in most cases, those business points not specifically addressed in a contract are determined by the 'customary practice' in the industry. For example, if the agreement requires title insurance, but does not state which party pays for it, then a court would assume that, since they didn't state otherwise, the parties intended to follow local custom. My hotdog purchase example above is another example of how we rely on custom (ie, it is customary to provide a bun and condiments with a hot dog purchase). The more you specifically state in your contract the less chance you will have to worry that local custom may favor the other party. And keep in mind-everything is negotiable. When buying a car it is much easier to get the floor mats thrown in for free BEFORE you are legally bound to the contract. So when you look at a letter of intent... think hard... think outside the box... what might you need that the letter of intent doesn't include? And, is it going to be easier to negotiate that into the letter of intent now, or later when you negotiate the details of the contract?

For a retail lease for space in a shopping center a letter of intent should at least include: (i) the parties names, (ii) the name and location of the shopping center, (iii) the size and location of the space in the shopping center, (iv) the condition of the space when delivered to the tenant (Is it "turnkey", i.e., ready for occupancy or does the landlord just provide a shell, and if so, what is in the "shell"? Is there a ceiling? Do you get new paint and carpet? Are all necessary utilities available at the space in the quantities you need?), (v) the term (duration) of the lease, (vi) the delivery date and when rent starts, (vii) the base rental rate, (viii) all additional rental expenses (such as common area maintenance, real estate taxes, insurance, utilities, marketing fees and other fees), (ix) construction and maintenance responsibilities, (ix) who is responsible for the broker fees, if any, (x) renewal terms (and rents) if any, and (xi any other special needs that you need to be addressed in the contract.

Think about the logistics of your business operation. What is important to you? If visibility and access from a specific roadway are important or if your business relies on a specific co-tenancy (such as a movie theater next to your ice cream store) and they are deal breakers for you, you should specifically make those matters part of the letter of intent. Remember, you will be making more of an emotional and financial commitment to a deal once you start paying a lawyer to negotiate the written contract, and it is easier to walk away from a bad deal before you make that extra investment.

The best thing about a letter of intent is that it lets you explore and address most if not all of the variable costs and contingencies before you commit to the agreement. NEVER sign a contract until you have identified and/or have 'caps' upon all of your costs. I have seen more than one tenant fail before they even opened their doors because they ran into unexpected cost overruns. Keep in mind that all the expenses due under your lease are your 'occupancy charges'. Most retail businesses cannot support occupancy charges that exceed 10-15% of their gross sales. A cheap base rent with a huge CAM and Taxes expense is no better than a high base rent with a low CAM and Taxes if the total occupancy cost is the same. Account for all of your occupancy costs, as there is some truth to the saying 'your business can be nickeled and dimed to death'. Smart tenants always work with a proforma that tells them what their maximum occupancy costs can be based upon their projected sales volume, and they don't do deals where the total occupancy costs exceed that amount.

DO NOT RELY ON VERBAL AGREEMENTS. Most written contracts specifically supersede all previous verbal agreements and conversations. "If it ain't in the written contract, it never happened." It is your job to make sure that all verbal statements made by the other party that are crucial to your deal are included in your contract, and one way to help make sure that happens is to include them into the letter of intent. Note, most sophisticated contracts will have a clause which says it supersedes all prior verbal and written agreements, so you need to make sure that the contract includes all of the important agreements set forth in the letter of intent. ALSO, FEW WRITTEN CONTRACTS CAN BE EFFECTIVELY AMENDED BY A VERBAL AGREEMENT, SO ALWAYS MAKE SURE YOU PUT ANY VERBAL AGREEMENT TO AMEND A CONTRACT INTO A WRITTEN AGREEMENT SIGNED BY BOTH PARTIES.

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