A letter of intent for a commercial lease is a short document, usually two to four pages, that sets out the business terms both sides have agreed to before lawyers draft the lease. It is normally non-binding as to the deal itself, with a few clauses that are expressly binding: confidentiality, exclusivity, and who pays their own costs. Its job is to make sure the parties agree on rent, term, space, and money before anyone spends money on a lease document.
What an LOI does, and what it does not
The LOI (also called a term sheet or letter of understanding) is where the deal actually gets negotiated. By the time a draft lease circulates, the economics are settled and the remaining fight is over risk allocation, indemnities, and default remedies. Skipping the LOI means negotiating economics inside a 60-page document at legal rates, which is slower and more expensive for both sides.
What the LOI does not do is create a lease. It does not give the tenant a right to the space, and in most drafting it does not stop the landlord from continuing to market it. That is what an exclusivity or no-shop clause is for, and if a tenant is about to spend money on architects and permits, it should ask for one.
Is a letter of intent binding?
Usually not, but this is the clause that produces litigation, so it deserves care. Most commercial lease LOIs state plainly that the document is non-binding and that no obligation arises until a definitive lease is signed by both parties. Courts generally honor that language.
The exceptions matter:
- Selected binding provisions. Confidentiality, exclusivity, governing law, and expense allocation are commonly carved out as binding even though the rest is not.
- Silence is dangerous. An LOI with no disclaimer that covers all essential terms and reads like an agreement can be enforced as one, depending on the state and the parties' conduct.
- Duty to negotiate in good faith. Some jurisdictions imply an obligation to negotiate in good faith toward a final agreement once an LOI is signed, even where the terms themselves are non-binding.
- Conduct can override text. A tenant that takes possession and starts paying rent after an LOI may find a court treating the arrangement as a lease regardless of what the letter said.
Whether a specific letter binds anyone is a state-law question that turns on the exact wording and the surrounding facts, and the case law on preliminary agreements varies meaningfully by jurisdiction. If real money is at stake, have counsel review it, or at minimum look up how your state's courts have treated preliminary agreements before you sign something without a disclaimer.
What to include in a commercial lease LOI
A good LOI settles every term that could change the economics. Anything left to "to be negotiated" will be negotiated later at your expense and usually not in your favor.
| Term | What to state |
|---|---|
| Parties | Exact legal entity names, plus any guarantor |
| Premises | Suite, rentable square feet, measurement standard, load factor |
| Term | Length, target commencement, and how commencement is triggered |
| Base rent | Rate per square foot, escalation method and percentage |
| Lease structure | Gross, modified gross with base year, or triple net with estimated load |
| Free rent | Number of months and whether it abates additional rent too |
| Improvement allowance | Dollars per square foot, what it covers, who builds, who owns the work |
| Operating expenses | Base year, pro-rata share, cap on controllable costs, exclusions, audit right |
| Security | Deposit or letter of credit, amount, burn-down schedule |
| Options | Renewal, termination, expansion, right of first refusal, with notice windows |
| Use and exclusivity | Permitted use, and any exclusive on competing tenants in retail |
| Assignment | Whether transfers to affiliates or a buyer of the business are permitted |
| Brokers | Who represents whom and who pays commission |
| Contingencies | Financing, permits, zoning, board approval, delivery condition |
| Binding provisions | Confidentiality, exclusivity period, costs, governing law, expiration of the offer |
The terms most often left vague, and what they cost
The improvement allowance. "$50 per square foot TI" sounds settled until the lease says the allowance excludes soft costs, architectural fees, permits, and cabling, and that unused allowance is forfeited. Specify what it covers, whether it can be applied to rent, and the disbursement mechanism. Our guide to the tenant improvement allowance covers how it is treated in accounting as well.
Operating expenses. An LOI that says "NNN, estimated $9 psf" has agreed to nothing about caps, gross-ups, or exclusions. Put the cap on controllable expenses and the audit right in the LOI. Asking for them in the lease draft, after the landlord thinks the deal is done, is a much harder conversation. See gross lease vs net lease for how the structures differ.
Commencement. Rent should start when the space is delivered in the agreed condition, not on a calendar date the landlord picks. If the buildout is late, the tenant should not be paying for space it cannot occupy. Tie commencement to substantial completion plus a fixed fixturing period.
Delivery condition. State what the landlord delivers: demolished to shell, HVAC in working order with a warranty period, code compliant, ADA compliant in common areas. "As is" in an LOI can turn into a six-figure surprise.
Renewal rent. If the LOI promises a renewal option "at fair market rent," settle in the LOI whether market accounts for the concessions a new tenant would get. Read the commercial lease renewal guide before you agree to a bare fair-market formula.
How the LOI moves into the lease
Once signed, the LOI becomes the drafting instruction. The landlord's counsel prepares the lease from its own form, and the tenant's job is to confirm every LOI term actually appears, unchanged, in the document. This is where deals quietly degrade: an allowance becomes conditional, a cap becomes annual instead of cumulative, an assignment right picks up a landlord consent requirement that was never discussed.
Do the comparison methodically. Put the LOI terms in one column and the corresponding lease provision, by section number, in the next, and flag anything that moved. On a portfolio deal or a multi-site rollout where a dozen LOIs feed a dozen leases, that reconciliation is exactly the work lease abstraction automates: Leaseabstracts pulls the executed terms into a structured, source-linked abstract so you can check the signed lease against what was agreed, clause by clause. See how law firms and brokers use it, and what a finished lease abstract contains.
LOI etiquette that speeds deals up
- Put an expiration on the offer. Five to ten business days keeps it from being shopped.
- Send it as an editable document. A PDF invites a phone call; a redline invites a counter.
- Counter the whole thing at once. Serial single-issue negotiation burns weeks and goodwill.
- Ask for the landlord's lease form early, ideally attached to the LOI. Its default positions on assignment, default, and casualty tell you more about the deal than the rent does.
- Keep the disclaimer clear. One sentence stating that nothing is binding except the listed provisions until a lease is fully executed prevents most disputes.
Letter of intent FAQ
What is a letter of intent for a commercial lease?
It is a short document setting out the agreed business terms of a proposed lease, rent, term, space, allowances, options, and structure, before a lease is drafted. It is usually non-binding as to the deal itself, with confidentiality, exclusivity, and cost provisions expressly binding, and it serves as the drafting instruction for the lease.
Is a letter of intent for a lease legally binding?
Typically no, provided it says so. Most LOIs state that no obligation arises until a definitive lease is executed, and courts generally enforce that. Certain provisions are usually binding by design, and an LOI with no disclaimer that covers all essential terms can be enforced as an agreement depending on state law and the parties' conduct.
What should a commercial lease LOI include?
Parties and guarantor, premises and square footage, term and commencement trigger, base rent and escalations, lease structure and operating expense treatment including caps and audit rights, free rent, improvement allowance, security deposit, renewal and termination options, permitted use, assignment rights, brokers, contingencies, and which provisions are binding.
Can a landlord back out after signing an LOI?
Generally yes, if the LOI is non-binding and no exclusivity clause applies. Some states imply a duty to negotiate in good faith once an LOI is signed, which can create exposure for walking away for no reason. A tenant that will spend money on design or permits should negotiate a binding exclusivity period to protect that spend.
How long does it take to go from LOI to signed lease?
Commonly 30 to 60 days for a straightforward office or retail deal, longer where the buildout is complex, a lender consent or subordination agreement is needed, or the tenant is a public entity. The tighter the LOI, the faster the lease, because there is less left to negotiate inside the document.
Do I need a lawyer for a letter of intent?
For anything beyond a small short-term space, yes. The LOI is where the economics are decided, and terms conceded there are very hard to recover in the lease draft. A short review by real estate counsel before signing costs far less than renegotiating an allowance, a cap, or an assignment right after the landlord considers the deal agreed.