The letter of intent (LOI) is the most important document most tenants treat like a formality. It shouldn't be. What you agree to in the LOI shapes every negotiation that follows — and landlords know this.
Every commercial lease deal starts with an LOI. Whether you're leasing 1,000 square feet of retail space or 50,000 square feet of Class A office, the process is the same: before lawyers draft anything, the two parties sketch out the deal's key terms in a short document called a letter of intent, memorandum of understanding (MOU), or term sheet.
This guide covers everything you need to know: what goes in an LOI, which terms are binding vs. non-binding, how to negotiate from one, common pitfalls, and how to verify the final lease actually reflects what you signed.
A letter of intent (LOI) in commercial real estate is a short, non-binding document (usually 2–5 pages) that outlines the key terms of a proposed lease before the formal lease agreement is drafted. It's the equivalent of a handshake in writing — enough structure to move forward, not enough detail to be a contract.
The LOI serves a critical purpose: it saves both parties weeks of legal work by confirming there's enough agreement on the major deal points to justify drafting a full lease. If you can't agree on rent, term, and TI in an LOI, you won't agree in the lease.
LOIs are typically non-binding on the deal itself — but certain clauses within an LOI are legally binding, including confidentiality provisions, exclusivity/no-shop clauses, and sometimes deposit terms. Read the LOI carefully before signing.
| Factor | Letter of Intent (LOI) | Lease Agreement |
|---|---|---|
| Length | 2–5 pages | 30–100+ pages |
| Binding? | Generally non-binding (with binding carve-outs) | Fully legally binding |
| Purpose | Align on deal terms; authorize drafting | Define every right and obligation |
| Drafted by | Broker or tenant rep (often) | Landlord's attorney (usually) |
| Negotiation leverage | Highest — everything is still open | Lower — LOI terms anchor the conversation |
| Time to execute | Days to 1–2 weeks | 3–8 weeks from LOI |
| Attorney required? | Recommended but not always used | Always recommended |
A well-drafted LOI covers every major deal point. Here's what should be in every commercial LOI — and what each term actually means.
Identify the tenant (legal entity name, not just "ABC Corp"), landlord, property address, suite/floor, and exact square footage. Square footage discrepancies between LOI and lease are common and can cost tens of thousands over a long term.
Always clarify whether square footage is rentable or usable. Rentable SF includes a "load factor" for common areas (typically 10–30%). A 10,000 RSF suite may only have 8,200 usable square feet. This directly affects your effective rent per square foot.
State the proposed lease commencement date, expiration date, and total term (e.g., 5 years). Include whether the commencement date is fixed or tied to a trigger (e.g., substantial completion of buildout). Also specify the rent commencement date — this is when you actually start paying rent, which may be weeks or months after your commencement date if you negotiate a free rent period.
Specify the base rent rate, how it's quoted (per square foot annually or monthly), and whether it's gross, modified gross, or NNN. A $30/SF/year NNN lease looks very different from a $30/SF/year gross lease once you add operating expenses. Always confirm which structure applies in the LOI.
State how rent increases over the lease term — flat percentage (e.g., 3% annually), CPI-based, or fixed step increases. This is one of the most financially significant LOI terms. A 3% vs. 4% annual escalation on a 5-year, 10,000 SF lease at $35/SF is a difference of roughly $35,000 in total rent paid.
For NNN and modified gross leases, the LOI should indicate what operating expenses the tenant is responsible for, whether there's a base year, and if CAM charges are capped. A CAM cap of 3–5% annually is standard in many markets; uncapped CAM is a red flag.
State the TI allowance per square foot the landlord is offering. Also specify whether unused TI can be applied to free rent, what the buildout approval process looks like, and how reimbursement works (most landlords reimburse after work is complete and receipts are submitted). TI allowances currently range from $20–$150/SF depending on market, condition, and lease term.
Specify the number of months of free rent at the start of the lease. This is one of your best negotiation chips — landlords often prefer giving free rent (no cash outlay) to reducing face rent (which affects building valuation). Even 1–2 months free rent on a 5-year lease has significant NPV.
Define exactly what you'll use the space for. "General office use" is fine. Vague language can limit future sub-tenants or allow the landlord to claim breach if you add a small conference/event component. Be specific but broad enough to accommodate growth.
If you want renewal rights, get them in the LOI. Specify how many options, at what rate (fixed, FMV, or capped FMV), how much notice is required (typically 6–12 months before expiration), and whether renewal rights survive a default cure. Renewal options not in the LOI are routinely excluded from the final lease.
If adjacent space may become available and you'd want it, request a Right of First Refusal (ROFR) or Right of First Offer (ROFO) in the LOI. These rights are much harder to negotiate once the lease is being drafted.
For retail tenants especially, request that the landlord not lease space in the same building or center to a direct competitor. Define "competitor" specifically — vague exclusivity clauses are routinely challenged.
If the landlord requires a personal guarantee, negotiate to limit it (e.g., cap at 12 months of base rent, or burn off after 24 months of on-time payment). State the personal guarantee requirements explicitly in the LOI, or they'll expand in the lease.
State the amount, whether it can be replaced by a letter of credit, and the conditions under which it's returned. Security deposits are typically 1–3 months of rent but can be higher for newer entities without credit history.
Once the LOI is signed, most landlords request an exclusivity period (typically 30–60 days) during which they will not negotiate with other prospective tenants for that space. This clause is usually binding. Make sure the exclusivity period is long enough for you to do proper due diligence.
Both parties typically agree to keep LOI terms confidential. This clause is also typically binding, even in an otherwise non-binding LOI.
| Clause | Typically Binding? | Notes |
|---|---|---|
| Base rent, TI, free rent, term | Non-Binding | Deal terms — subject to formal lease negotiation |
| Renewal, expansion, exclusivity options | Non-Binding | Business terms; must be in the lease to be enforceable |
| Exclusivity / no-shop period | Binding | Landlord agrees not to negotiate with others for a set period |
| Confidentiality clause | Binding | Both parties agree to keep LOI terms private |
| Good faith negotiation | Varies | Courts have split on enforceability; depends on language |
| Deposit (if any) | Binding | If a deposit is paid with the LOI, terms for return must be clear |
| Non-binding declaration | Binding | Language explicitly stating the LOI is non-binding — this language itself is binding |
Tenants assume that because an LOI is "non-binding," they can freely walk away. In reality, if you signed an exclusivity clause, the landlord may have turned away other prospects during that period. Some jurisdictions have found tenants liable for negotiating in bad faith even without a binding LOI. Don't sign unless you're serious.
The LOI is where your leverage is highest. Once the lease is drafted, the landlord's attorney will use the LOI as a floor for every term — meaning you're negotiating up from the landlord's baseline. Here's how to negotiate effectively:
Here's where many tenants get caught: they negotiate a solid LOI, then never verify that the executed lease actually reflects those terms.
Landlord attorneys draft leases — not the landlord, and not you. The draft can diverge from the LOI on subtle but significant points: escalation language, CAM cap mechanics, renewal option notice requirements, or TI reimbursement conditions. These divergences aren't always intentional, but they're always expensive if uncaught.
By the time you're reviewing a 60-page lease document, it's easy to miss that the "3% annual escalation" from your LOI was rewritten as "3% or CPI, whichever is greater" in the lease body. On a 10-year lease, that small change could add six figures to your total rent obligation.
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If you discover that the landlord's draft lease diverges from the signed LOI, you have several options:
Once your lease is executed, run it through LeaseAI to create a clean, structured abstract of all 16+ key fields. File it alongside the LOI so your team always has both documents accessible — especially useful at renewal time when you need to know exactly what options you have and when notices are due.
Not legally required, but recommended. A tenant rep broker can draft a competent LOI for most deals, but an attorney should review any LOI that includes binding clauses, a deposit, or a personal guarantee — all of which are enforceable from the moment you sign.
A simple LOI for a straightforward lease can be agreed to in 2–5 business days. Complex deals with multiple properties, extensive tenant concessions, or institutional parties can take 2–3 weeks to finalize the LOI alone.
Yes — because the LOI is non-binding on the deal terms, a landlord can technically walk away from the lease negotiation after signing an LOI. In practice, this is rare and damages the landlord's reputation. If the landlord signed an exclusivity clause, they must honor it.
In commercial real estate, "letter of intent," "term sheet," and "memorandum of understanding" (MOU) are often used interchangeably. Some practitioners use "term sheet" for a brief bullet-point version and "LOI" for a more formal letter-style document, but they serve the same purpose and have the same legal standing.
Whoever drafts the LOI controls the starting point. If a landlord's agent sends you an LOI, you can redline it or submit your own. For large deals, your tenant rep or attorney should draft the initial LOI so you control the anchor terms.
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