Letter of Intent

What a letter of intent means

A letter of intent is a written snapshot of a deal in progress. It captures the major points two parties have tentatively agreed on, a proposed rent, a purchase price, a lease term, a closing date, and sets them down in one place before anyone invests the time and legal fees required to draft a full contract. In commercial real estate, the LOI is the bridge between an early conversation and a signed agreement.

The most important thing to understand about an LOI is the distinction between binding and non-binding language. The bulk of the document describes commercial terms that the parties intend to negotiate further, so those terms are proposals rather than promises. Either side can still walk away or push for changes as the formal contract takes shape. At the same time, most LOIs carry a small set of clauses that the parties do want to enforce immediately, and a well-written LOI states plainly which provisions are binding and which are not.

This dual nature is what makes the LOI both useful and occasionally misunderstood. A party that treats every line as a firm commitment may feel surprised when terms shift during drafting. A party that treats the whole thing as casual may overlook a confidentiality or exclusivity clause that genuinely binds it. The value of the document comes from being explicit about which parts carry weight and which parts remain open.

Why letters of intent matter in commercial real estate

Commercial transactions are detailed and expensive to document. A full office lease can run dozens of pages, and a purchase agreement for an institutional asset can run far longer, with schedules, representations, and conditions attached. Drafting those documents consumes attorney time on both sides. A letter of intent lets the parties confirm they are aligned on the essentials before that spending begins, which protects everyone from negotiating a long contract only to discover a gap on a fundamental point.

The LOI also creates clarity. By writing down the proposed rent, term, allowances, and key dates, both sides reduce the risk of a misunderstanding that surfaces later. A broker can circulate an agreed LOI to the attorneys as a drafting roadmap, and the lawyers can produce a first draft that already reflects the business deal rather than guessing at it. That alignment tends to shorten the path from handshake to signature.

There is a relationship dimension as well. An LOI signals genuine interest and a willingness to transact, which can be reassuring to a counterparty weighing several prospects. When a landlord receives a serious LOI from a creditworthy tenant, it may grant a period of exclusivity and stop showing the space to others. When a buyer submits an LOI on a property, the seller gains a written basis for taking the asset off the market during due diligence. These commitments rest on the binding portions of the document.

The stakes look different across the kinds of deals an LOI supports. In a lease, the LOI sets the economic framework for a tenancy that may last five, ten, or fifteen years, so getting the rent structure and the tenant improvement allowance right at this stage shapes the value of the relationship for both landlord and tenant. In an acquisition, the LOI frames a one-time transfer of a substantial asset, so the purchase price, the deposit, and the due diligence period carry enormous weight. A clear, well-structured letter of intent serves both settings by giving the parties a shared starting point they can rely on as the formal documents come together.

Key components of a letter of intent

Although every deal is different, most letters of intent share a recognizable anatomy. Understanding these parts helps a reader see where the negotiation stands and what remains open.

Key terms in a lease LOI

A lease LOI focuses on the economics and structure of the tenancy. It identifies the premises and the rentable square footage, the lease term and any renewal options, and the base rent along with the escalations that increase it over time. It also addresses concessions such as free rent and the tenant improvement allowance, the expense structure that determines who pays operating costs, the permitted use of the space, and the commencement date. Together these points describe the deal a formal lease will later spell out in full.

Binding vs non-binding provisions

The commercial terms above are almost always non-binding, because the parties expect to refine them during lease drafting. A separate group of provisions is usually binding from the moment the LOI is signed. Confidentiality keeps the terms and the existence of the negotiation private. Exclusivity, sometimes called a no-shop clause, prevents one side from negotiating with others for a set period. A governing law clause and a statement that each party bears its own costs are common as well. A careful LOI labels each section so there is no doubt about which obligations take effect right away.

The LOI in a purchase context

In an acquisition, the LOI shifts toward the terms of a sale. It states the proposed purchase price and how the earnest money deposit will be handled, defines the due diligence period during which the buyer inspects the property and reviews leases and financials, and sets a target closing date. It often outlines key conditions, such as financing or board approval, and confirms what is included in the sale. As with a lease, the economic terms are proposals while clauses like exclusivity and confidentiality are written to bind the parties during the study period.

What a typical lease LOI includes

When a property team or broker drafts a lease LOI, a familiar checklist of items tends to appear. Capturing each one early keeps the eventual lease negotiation focused on language rather than fundamentals.

• The parties and the premises, naming the landlord and tenant and identifying the suite, building, and rentable area.
• The lease term and options, including the start date, the length of the initial term, and any renewal or expansion rights.
• Base rent and escalations, stating the starting rate and how it steps up over the life of the lease.
• Concessions, such as free rent periods and the tenant improvement allowance the landlord will fund.
• The expense structure, clarifying whether the lease is gross, net, or modified, and who covers operating costs and taxes.
• Permitted use and key conditions, describing how the tenant may use the space and any approvals the deal depends on.

Common letter of intent terms

The table below summarizes terms that frequently appear in a commercial LOI and what each one specifies. Reading an LOI is largely a matter of knowing what these standard line items mean.

Negotiating and using an LOI effectively

The teams that get the most value from a letter of intent treat it as a precise instrument rather than a formality. They cover the points that genuinely drive the deal, the rent, the term, the allowance, the price, the closing date, so the formal contract starts from a clear foundation. At the same time, they resist the urge to negotiate every detail in the LOI itself, because overloading the document slows the process and invites disputes over language that belongs in the final agreement.

Clarity on binding language is the single most important practice. A strong LOI separates the non-binding commercial terms from the binding provisions in plain words, often with a dedicated section stating that only the named clauses are enforceable. This protects both sides. It lets the parties speak openly about the deal while preserving the confidentiality and exclusivity they have agreed to honor, and it prevents a later argument about whether the whole document was a contract.

It also helps to move quickly once the LOI is agreed. The document reflects a moment of alignment, and that alignment is easiest to convert into a signed lease or purchase agreement while interest is fresh. Setting a target date for the first contract draft, and naming the attorneys who will handle it, keeps momentum. Reviewing the LOI against the eventual contract is a useful final check, confirming that the business deal everyone agreed to is the deal the binding document actually delivers.

Frequently asked questions

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