Letter of intent (LOI) is a preliminary document that sets the main economic terms of a proposed commercial lease or purchase before the binding contract is drafted. It states rent, term, tenant improvement allowance, and free rent, and is generally non-binding except for specific clauses such as confidentiality and exclusivity.
What Is a Letter of Intent in Commercial Real Estate?
A letter of intent in commercial real estate is a short term sheet that records the headline deal points both sides have tentatively agreed to, before lawyers draft the full lease. It fixes rent, term, allowances, and options on paper so the parties can decide whether to proceed to a binding contract.
The LOI is also called a term sheet or memorandum of understanding. According to Troutman Pepper Locke and Feldman Equities, it is generally non-binding: it does not obligate either party to sign a lease, and either side can walk away. The document exists to test alignment cheaply before either party spends on legal drafting and due diligence.
Term commonly set in an LOI | What it covers |
Base rent and escalations | Starting rent per square foot and annual increases |
Lease term | Length of the lease and any renewal options |
Tenant improvement allowance | Landlord contribution to buildout, per square foot |
Free rent | Abated months at the start of the term |
Permitted use and exclusivity | What the tenant may operate and any protected uses |
Guarantees and assignment | Personal or corporate guaranty and transfer rights |
Certain provisions are drafted to be binding even when the LOI as a whole is not. Per Troutman Pepper Locke, confidentiality, exclusivity or no-shop periods, and good-faith negotiation clauses can each carry legal force if the document marks them as binding.
Why the Letter of Intent Matters
The letter of intent matters because it anchors every term that follows: the lease is drafted from the LOI, so a point conceded there is hard to reclaim later. It shifts negotiation to the cheapest stage of a deal, before either party commits legal spend, and it surfaces dealbreakers early.
A weak LOI creates risk in two directions. If it reads like a finished deal with no open terms and no non-binding disclaimer, a court may enforce it as a contract. Per Troutman Pepper Locke, judges look at whether key terms remain open and whether the document states it is non-binding. If it is vague, the parties re-litigate basic economics during lease drafting and waste weeks.
The quotable point for an operator: whatever you agree to in the LOI you will live with in the lease, because the lease is drafted from the LOI, not from scratch.
Example
A tenant and landlord negotiate an LOI for 8,000 rentable square feet. The LOI sets $32 per square foot base rent, 3% annual escalations, a 7-year term, a $45 per square foot tenant improvement allowance, and 4 months of free rent. These figures become the spine of the lease.
LOI term | Agreed figure | Annual or total value |
Rentable square feet | 8,000 | Given |
Base rent per RSF | $32 | $256,000 year one |
Annual escalation | 3% | Rent rises each year |
Term | 7 years | Full lease length |
TI allowance | $45 per RSF | $45 x 8,000 = $360,000 |
Free rent | 4 months | 4 / 12 x $256,000 = $85,333 year-one abatement |
The year-one abatement is 4 divided by 12, multiplied by $256,000, which equals about $85,333. The TI allowance is $45 multiplied by 8,000, or $360,000. Both concessions are locked at the LOI stage. If the tenant tries to raise the allowance to $55 per square foot during lease drafting, the landlord can point to the signed LOI and refuse.
Variations and Edge Cases
A letter of intent is not a single fixed instrument: its enforceability and content shift with how it is drafted and what deal it precedes. A sale LOI differs from a lease LOI, and a binding-marked clause behaves differently from the non-binding body around it. The table covers the variants an operator should confirm before signing.
Variant | Treatment |
Non-binding LOI | Default; neither party is obligated to proceed to a lease |
Binding clauses inside a non-binding LOI | Confidentiality, exclusivity, and good-faith clauses can be enforceable if marked binding |
LOI that reads as a finished contract | Risk of a court enforcing it; include an explicit non-binding disclaimer |
Sale LOI vs lease LOI | Sale LOI sets price and due diligence; lease LOI sets rent and concessions |
Expiration window | Often a handful of business days to keep the deal moving |
The most common mistake is signing an LOI without a clear non-binding disclaimer, then treating it as harmless. Per Troutman Pepper Locke, a document that fixes all material terms and omits the disclaimer can bind the parties even when they thought it would not.
Letter of Intent vs Lease Agreement
Letter of intent is often confused with the lease agreement, and both record deal terms, but they differ in force. A letter of intent is a generally non-binding term sheet that outlines proposed economics. A lease agreement is the fully binding contract, executed by both parties, that governs the tenancy and is enforceable in court.
The LOI comes first and shapes the lease; the lease comes second and controls. The LOI can be walked away from with few consequences outside its binding clauses. The signed lease cannot: it creates enforceable rent, term, and default obligations for the full tenancy.
Frequently Asked Questions
Is a letter of intent binding in commercial real estate?A letter of intent is generally non-binding and does not obligate either party to sign a lease. However, specific clauses such as confidentiality, exclusivity, and good-faith negotiation can be binding if the document marks them that way, and an LOI with no non-binding disclaimer may be enforced by a court.
What does a commercial lease letter of intent include?A commercial lease letter of intent typically includes base rent, annual escalations, lease term, renewal options, tenant improvement allowance, free rent, permitted use, exclusivity, and guaranty and assignment terms. It records the headline economics both sides have tentatively agreed to before the lease is drafted.
Why is the letter of intent so important if it is non-binding?The letter of intent matters because the lease is drafted from it, so any term agreed in the LOI is difficult to change later. It anchors the entire deal, surfaces dealbreakers before legal spend, and sets the economics the final lease will enforce.
Related Terms
Tenant Improvement Allowance
Base Rent
Rent Escalation Clause
Renewal Option
Estoppel Certificate