Commercial real estate letter of intent: what it is and what to include

What a commercial real estate letter of intent is

A commercial real estate letter of intent, often shortened to LOI, puts the shape of a lease or acquisition in writing before either side commits to the cost of full lease drafting or a definitive purchase and sale agreement. It is one of the most common documents in commercial property, used to line up a landlord and prospective tenant on rent and term, or a buyer and seller on price and closing conditions, before lawyers begin the detailed paperwork. In the market a letter of intent real estate professionals circulate may also be called a proposal letter, a term sheet, or heads of terms, but the function is the same: to confirm alignment on the key economics and set the agenda for the negotiation that follows.

There are two broad flavors. A leasing LOI covers premises, rentable square footage, base rent, escalations, operating expense treatment, and any tenant improvement work, and it typically precedes a full lease. An acquisition LOI covers the purchase price, deposit, due diligence and financing contingencies, and the target closing date, and it precedes a purchase and sale agreement. Both share the defining feature of every letter of intent: a mixed legal character. Under US law most substantive terms are framed as non-binding statements of intent, so neither side can be forced to close on those terms alone, while a handful of provisions are drafted to bind from signature. Courts look at both the wording and the parties’ conduct to decide what actually binds, so being explicit about that line is the single most important drafting choice in the document.

Key terms and clauses to include

A well-drafted commercial real estate letter of intent gives enough detail to guide the deal while leaving each side free to walk away until the definitive agreement is signed. The provisions below are the ones landlords, tenants, buyers, and sellers most expect to see.

• Parties and property. Identify each party by legal name and describe the property precisely, including address, suite or unit, and the rentable or usable square footage.
• Transaction type and structure. State plainly whether the deal is a lease, a sublease, an assignment, or a purchase, and outline the basic structure.
• Price or base rent. For a purchase, state the offer price, earnest money deposit, and how the deposit becomes non-refundable. For a lease, state base rent, the rent commencement date, and any free rent or abatement period.
• Term, renewals, and options. Set the lease term and any renewal options, or, for a sale, the target closing date and any option or right of first refusal.
• Operating expenses and rent structure. Specify whether the lease is gross, modified gross, or triple net (NNN), and how common area maintenance (CAM), taxes, and insurance pass through to the tenant, including any caps or base year.
• Tenant improvements and condition. Describe any tenant improvement allowance, who performs and owns the work, and the condition in which the space is delivered.
• Contingencies. List the gating conditions, such as financing, satisfactory due diligence, inspection, title review, survey, zoning confirmation, and environmental assessment, that must be met before the parties are bound.
• Exclusivity or no-shop. Give the buyer or tenant a defined window during which the other side agrees not to market the property or negotiate competing deals.
• Due diligence period. State the access, records, and cooperation each side will provide and the time allowed for review.
• Brokerage commission. Identify the brokers and state who pays the commission, since an LOI can inadvertently trigger a broker’s fee obligation.
• Binding versus non-binding provision. Include an explicit clause stating which sections legally bind the parties and which are only statements of intent. This clause prevents the most expensive disputes.
• Confidentiality. Protect the financial, tenant, and operating information exchanged during diligence.
• Governing law and dispute resolution. Choose the state law that governs the letter and how disputes over the binding provisions are resolved.
• Expiration. Set a date on which the offer lapses if a definitive agreement has not been signed, which keeps momentum and prevents a stale letter from lingering.

When you need one

You do not need a letter of intent for every real estate transaction, but it earns its place whenever the deal is large, complex, or likely to run through a long negotiation. On a multi-year commercial lease it lets landlord and tenant settle rent, term, escalations, and improvement allowances before either side pays for lease drafting. On an acquisition it frames the price, deposit, and contingency structure so the buyer can justify the cost of title, survey, and environmental work, and so the seller can gauge how serious the buyer is before taking the property off the market.

A commercial real estate letter of intent is also useful whenever a party needs something concrete to move an internal process forward, such as securing lender financing, obtaining investment committee or board approval, or coordinating with a broker. Putting rent or price and the core conditions in writing often surfaces deal-breakers early, because gaps that a phone call conceals become obvious once the numbers sit side by side on paper. For a small, short, or fully priced deal, by contrast, moving straight to the lease or purchase agreement is usually faster and cleaner.

Common pitfalls

The most frequent and costly mistake is ambiguity about whether the letter binds the parties. A letter that reads like a lease or a contract, is signed, and is followed by conduct such as paying a deposit or handing over keys can be enforced as binding even if the parties assumed it was only preliminary, so the binding-versus-non-binding clause must be unmistakable.

A second pitfall is the “agreement to agree.” Language promising to negotiate the remaining lease or purchase terms later is often unenforceable, and in some states it can still create a duty to negotiate in good faith, which produces liability the parties did not expect.

Other recurring problems are specific to real estate. Overlooking how operating expenses pass through, especially under a triple net structure, can leave a tenant exposed to costs it never priced. Ignoring the brokerage commission clause can trigger a fee even if the deal never closes. Over-specifying terms can lock a party into a position before due diligence, inspection, or environmental review is complete, while under-specifying leaves too much open for the definitive agreement to resolve cleanly. Forgetting an expiration date leaves a stale offer hanging over a property that has moved on, and signing without internal or lender authority can create confusion about whether the party is actually committed.

From letter of intent to disciplined contract management

A commercial real estate letter of intent is only the first document in a chain that runs through the lease or purchase agreement to renewals, options, amendments, and expiration. Treating it as a governed record rather than a loose email attachment keeps its binding obligations, such as confidentiality, exclusivity, and any deposit or deadline terms, visible and enforceable. A contract lifecycle management platform such as Pactolane can hold the letter in a central repository, route it through approval workflows so that only authorized signers commit the company, and capture eIDAS electronic signatures with a full audit trail. Renewal and deadline alerts keep exclusivity windows, due diligence periods, and option dates from lapsing unnoticed, and PactAI can produce an executive summary of the letter, answer questions about its terms through conversational chat, and score its risk from 0 to 100 so the human can decide with the full picture in view. Managed this way, a commercial real estate letter of intent becomes the disciplined starting point of a deal rather than a loose end.