Heads of terms for a commercial lease: what it is and what to include

What a heads of terms for a commercial lease is

Heads of terms for a commercial lease put the shape of a leasing deal in writing before either side pays for a full lease to be drafted. The document summarizes the economics and the key legal points that a landlord and a prospective tenant have agreed in principle, and it sets the agenda for the detailed negotiation that follows. In US commercial real estate the same instrument is more often called a letter of intent (LOI), a proposal letter, or a term sheet, but the function is identical: to confirm alignment on rent, term, and the core conditions before lawyers begin the paperwork.

The defining feature of the document is its mixed legal character. Under US contract law, most substantive terms are framed as statements of intent, which means neither side can be forced to sign a lease on those terms alone, while a small set of provisions is meant to bind immediately. Courts look at the words used and the parties’ conduct rather than the title of the document, so a summary that reads and behaves like a lease can be enforced as a binding commitment. Being explicit about which sections bind and which do not is therefore the single most important drafting decision the document involves.

Key terms and clauses to include

Well-drafted heads of terms for a commercial lease carry enough detail to steer the deal while leaving each side free to walk away until the lease is signed. The items below are the ones landlords, tenants, and their brokers expect to see.

• Parties and premises. Identify the landlord and tenant by legal name and describe the premises precisely, including the building address, suite or unit, and the rentable and usable square footage.
• Term and commencement. State the lease term, the anticipated commencement date, and any renewal options, expansion rights, or rights of first refusal on adjacent space.
• Base rent and free rent. Set the base rent, the rent commencement date, and any free rent or abatement period tied to build-out or occupancy.
• Rent escalations and reviews. Describe how rent steps up over the term, whether by fixed increases, a stated percentage, or a market or index-based review, so neither side is surprised later.
• Operating expenses and rent structure. Specify whether the lease is gross, modified gross, or triple net (NNN), and how common area maintenance (CAM), real estate taxes, and insurance pass through, including any base year, caps, or exclusions.
• Permitted use. State the use the tenant may make of the premises and any exclusivity the tenant needs against competing uses in the same building or center.
• Assignment and subletting. Set out whether, and on what conditions, the tenant may assign the lease or sublet the space, since alienation rights are a frequent point of negotiation.
• Tenant improvements and condition. Describe the tenant improvement allowance, who designs and performs the fit-out, who owns it, and the condition in which the landlord delivers the space.
• Repair and maintenance. Allocate responsibility for structure, roof, systems, and interior upkeep, and address the condition in which the tenant must surrender the premises.
• Break rights and early termination. State any option to terminate early, the notice required, and any fee or penalty, since a break right materially changes the value of the deal for both sides.
• Security deposit and guaranty. Set the deposit amount and any letter of credit or personal or corporate guaranty the landlord requires.
• Insurance. Outline the liability and property coverage each side must carry and any waiver of subrogation.
• Contingencies. List the gating items, such as satisfactory due diligence, board or investment committee approval, financing, and zoning or permitting confirmation, that must be met before a binding lease is signed.
• Exclusivity or no-shop. Give the tenant a defined window during which the landlord agrees not to market the space or negotiate competing offers.
• Confidentiality. Protect the financial and operating information exchanged during the negotiation, and intend this clause to bind from signature.
• Brokerage commission. Identify the brokers and state who pays the commission and when it is earned, because heads of terms can inadvertently trigger a broker’s fee.
• Binding versus non-binding statement. Include an express clause identifying which sections legally bind the parties and which are only statements of intent. This clause prevents the most costly disputes.
• Governing law and expiration. Choose the state law that governs the binding provisions, and set a date on which the heads of terms lapse if no lease has been signed.

When you need one

You do not need heads of terms for every lease, but they earn their place whenever the transaction is large, long, or likely to run through a detailed negotiation. On a multi-year lease of office, retail, or industrial space, heads of terms let the landlord and tenant settle rent, term, escalations, and the tenant improvement allowance before either side pays for a lawyer to draft the lease. On a fit-out heavy deal they align the parties on who builds and pays for the space, which is often the item most likely to derail a lease if it is left until drafting.

Heads of terms for a commercial lease are also useful when a party needs something concrete to move an internal process forward, such as securing lender financing, obtaining board or investment committee approval, or coordinating with a broker. Putting rent, term, and the fit-out arrangement in writing tends to surface 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 agreed lease of simple space, by contrast, moving straight to the lease itself is usually faster and cleaner.

Common pitfalls

The most frequent and expensive mistake is ambiguity about whether the document binds the parties. Heads of terms that read like a lease, are signed, and are followed by conduct such as paying a deposit or accepting keys can be enforced as binding even when the parties assumed they were only preliminary, so the binding-versus-non-binding statement must be unmistakable.

A related trap is the “agreement to agree.” Language promising to negotiate the remaining lease terms later is often unenforceable, yet in some states it can still create a duty to negotiate in good faith and the liability that comes with it.

Other recurring problems are specific to leasing. Glossing over how operating expenses pass through, especially under a triple net structure, can leave a tenant exposed to CAM, tax, and insurance costs it never priced. Leaving the tenant improvement allowance vague invites a fight over who pays for the build-out. Ignoring the brokerage commission clause can trigger a fee even if the lease never signs. Over-specifying terms can lock a party into a position before due diligence is complete, while under-specifying leaves too much for the lease to resolve. Forgetting an expiration date leaves stale heads of terms hanging over space that has moved on, and signing without internal or lender authority creates confusion about whether the party is truly committed. Finally, letting the heads of terms and the final lease drift out of alignment invites argument over which one reflects the real bargain.

From heads of terms to disciplined contract management

Heads of terms for a commercial lease are only the first document in a chain that runs through the signed lease to rent reviews, renewals, break dates, and expiration. Treating them as a governed record rather than a loose email attachment keeps their binding obligations, such as confidentiality, exclusivity, and any agreed deadlines, visible and enforceable. A contract lifecycle management platform such as Pactolane can hold the heads of terms in a central repository, route them 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, contingency deadlines, and break dates from lapsing unnoticed, while PactAI can produce a multilingual executive summary, answer questions about the terms through conversational chat, and score the document’s risk from 0 to 100 so the human makes the final call with the full picture in view. Managed this way, heads of terms for a commercial lease become the disciplined starting point of a leasing deal rather than a loose end.