A letter of intent, often called an LOI, is usually the first written step in a commercial lease deal. It is a short document that summarizes the key business terms the landlord and tenant have agreed to before the full lease is drafted. Think of it as a term sheet that keeps both sides aligned while the lawyers write the final agreement.
For tenants, the LOI is one of the most powerful tools in the leasing process. Almost everything you agree to in the LOI tends to carry through into the lease itself. That makes it the moment when you have the most leverage, because once attorneys start drafting, changing terms becomes expensive and time consuming. If you want to learn how to protect yourself at the signing stage, start with our guide on reading a lease before signing.
What a Letter of Intent Actually Is
An LOI is not a lease. In most cases, it is a non-binding outline of the deal points: the rent, the space, the term, and the main conditions. Either side can walk away before the lease is signed, unless the LOI contains specific clauses that say otherwise. This non-binding nature is what makes it a negotiation tool rather than a contract.
The real value of an LOI is efficiency. A full commercial lease can run 50 pages or more, and paying attorneys to redraft it every time a business point changes is costly. By settling the major terms in a two or three page LOI first, both sides give their lawyers a clear blueprint. The legal drafting then becomes mostly a matter of translating agreed points into formal language.
Binding vs Non-Binding Provisions
Most LOIs state clearly that the document is non-binding, meaning neither party can sue the other for failing to sign a lease. However, many LOIs carve out specific provisions that are binding, and these are the parts tenants should read most carefully. Common binding provisions include confidentiality, exclusivity, broker fee responsibility, and the obligation to negotiate in good faith.
The exclusivity or “no shop” clause deserves special attention. It prevents the landlord from marketing your space to other tenants for a set period while you negotiate. That is helpful because it stops a bidding war, but it also locks you into negotiations and can weaken your leverage if the talks stall. Try to keep the exclusivity period short, often 30 days or less.
The Key Business Terms to Nail Down
The heart of any LOI is the list of business terms. These are the points that will define your occupancy and your costs for years, so each one deserves attention. A strong LOI leaves as little as possible to interpretation later. The following sections cover the terms that matter most.
Premises and Rentable Square Footage
The LOI must identify the exact space you are leasing, including the suite number, floor, and rentable square footage. In commercial buildings, rentable square footage often includes a share of common areas, which means you pay for more space than you actually occupy. Ask the landlord to break out the usable square footage separately.
Base Rent and Escalations
State the base rent clearly, both as an annual figure and as rent per square foot. The LOI should also describe how rent increases over time. Common structures include fixed annual increases of two or three percent, increases tied to a consumer price index, or fair market resets at set intervals. Each structure has a very different cost impact.
If the rent is tied to fair market value at some future point, the LOI should describe how that value will be determined. Will there be one appraiser or three? What happens if the appraisers disagree? Getting the mechanics settled in the LOI avoids a costly fight years later. Our guide on negotiating rent to lower costs has more tactics for this stage.
Lease Term and Commencement
The LOI sets the length of the lease term and the expected start date. Pay close attention to when rent actually begins. Many LOIs separate the delivery date, the commencement date, and the rent commencement date. If the landlord is building out the space for you, rent should not start until the work is complete and you can move in.
Also address what happens if delivery is delayed. A good LOI gives the tenant rights if the landlord misses the delivery date, such as a rent credit or the ability to terminate after a long delay. Without this protection, you could be stuck paying for temporary space while the landlord finishes construction on their own schedule.
Tenant Improvement Allowance and Build-Out
The tenant improvement allowance, or TI allowance, is the amount the landlord contributes toward customizing the space for your use. It is usually expressed as a dollar amount per square foot. The LOI should state the amount, what it covers, and the deadline for spending it. This is often one of the largest economic items in the deal.
Clarify who manages the construction. In a turnkey deal, the landlord handles the build-out. In a TI allowance deal, the tenant usually hires the contractor and gets reimbursed. Each approach has pros and cons, but the key is to state the process in the LOI so the lease matches. Also confirm whether unused allowance can be applied to rent or moving costs, since many landlords let unused funds expire.
Do not forget the approval timeline for construction plans. The LOI can set deadlines for submitting plans and for the landlord’s approval, which keeps the project moving. Delays in plan approval are a common cause of late delivery, so building accountability into the LOI protects your move-in date.
Security Deposit and Guarantees
The LOI should state the security deposit amount, which in commercial leases is often one to three months of rent. It should also describe any conditions for reducing the deposit over time. Some leases allow the deposit to burn down after a year or two of on-time payments, and getting that promise in the LOI is much easier than fighting for it during lease drafting.
Options, Rights, and Flexibility Clauses
Commercial tenants should use the LOI to secure flexibility for the future. Renewal options, expansion options, contraction rights, and rights of first refusal on adjacent space all belong in the LOI. These clauses give you control over your future space needs at today’s negotiating leverage, which is always stronger than it will be mid-lease.
For a renewal option, the LOI should state the length of the renewal term, how much notice you must give, and how the renewal rent will be set. A vague promise of a renewal option is worth little if the rent mechanism is left open. Spell out whether renewal rent is at a fixed rate, a set increase, or fair market value with a defined appraisal process.
Assignment and subletting rights also deserve a line in the LOI. Most commercial leases require landlord consent for assignment or sublease, and the LOI can set the standard the landlord must meet, such as not unreasonably withholding consent. This protects you if you ever need to exit or downsize. Our lease signing tips cover more of these protective details.
Common LOI Mistakes Tenants Make
The biggest mistake is treating the LOI as a casual document. Tenants sometimes sign quickly to show good faith, then discover the lease reflects terms they never intended. Read every line of the LOI with the same care you would give the lease, because in practice the LOI sets the deal.
Another common error is leaving the operating expense structure vague. The LOI should state whether the lease is gross, modified gross, or triple net, and whether there is a base year or expense stop. Operating expenses can add a large amount to your occupancy cost, so the structure should be settled before drafting begins.
Finally, tenants often forget to address brokers and fees in the LOI. The document should state who pays the brokerage commission and confirm that no other brokers are owed fees. Sorting this out early prevents surprise claims after the lease is signed. A clean LOI on fees means a clean closing.
From LOI to Signed Lease
Once the LOI is signed, the landlord’s attorney typically drafts the lease based on it. Your attorney should review the draft against the LOI line by line and flag anything that deviates. This is where the LOI proves its worth: any term that matches the LOI is settled, and the negotiation can focus on the legal language rather than reopening business points.
Expect the lease to be longer and more detailed than the LOI. That is normal. The LOI covers the business deal, while the lease covers the legal mechanics of enforcing it. Your job during this phase is to make sure the lease says what the LOI promised, nothing more and nothing less. If a term appears in the lease that was never in the LOI, question it.
