Understanding the Letter of Intent in Commercial Leasing
When businesses begin the process of leasing commercial space, the very first step is often the Letter of Intent (LOI). An LOI is not a binding contract but rather a framework of key business terms agreed upon by both landlord and tenant before moving into the formal lease. Think of it as the “road map” for negotiations: it sets expectations, highlights deal points, and prevents costly surprises later in the lease drafting stage.
Key Provisions Every LOI Should Include
No matter the property type—office, retail, industrial, or ground lease—there are several provisions that should always be covered in an LOI:
Parties & Premises – Identify the landlord, tenant, and specific space (square footage, suite, or land parcel).
Term & Renewal Options – State the initial lease term and any rights to extend.
Base Rent & Escalations – Spell out starting rent, increases (fixed or percentage), and any abatement period.
Operating Expenses – Clarify responsibility for CAM, taxes, and insurance.
Delivery Condition – Define whether the premises will be delivered “as-is,” as a vanilla shell, or with specified improvements.
Tenant Improvements & Allowances – Establish what improvements the tenant or landlord will provide, and whether allowances are included.
Commencement & Possession Dates – Note when rent obligations start versus when the space is delivered.
Use & Exclusives – Define permitted use and any exclusive rights (e.g., no competing tenants).
Signage Rights – Outline what signage the tenant may install.
Brokerage – Identify commission terms to avoid later disputes.
Non-Binding Language – Make clear that the LOI is not the final lease and only becomes binding once a lease is executed.
These essentials create a strong foundation and prevent misunderstandings before lawyers draft the lease.
What is a Letter of Intent?
An LOI outlines the essential terms of a lease such as:
Tenant & Premises
Use
Rent Structure
Lease Term & Renewal Options
Expenses (CAM, insurance, property taxes)
Tenant Improvements and Delivery Condition
Signage and Exclusivity Rights
Brokerage and Legal Language
While LOIs vary by property type, their shared purpose is to make sure both sides are aligned before investing time and money in a full lease.
Differences by Property Type
Office Lease LOI
Office LOIs are typically straightforward. They often address:
Whether the lease is full-service or net
Lease terms of 3–5 years (longer for larger tenants)
Tenant improvement allowances for build-out
Allocation of operating expenses and future escalations
Retail Lease LOI
Retail LOIs tend to be more detailed, reflecting the competitive nature of shopping centers. Key points include:
Exclusive use clauses to protect against direct competitors
Percentage rent tied to sales performance (sometimes)
Co-tenancy requirements linked to key anchors
Delivery conditions (e.g., “vanilla shell”)
Tenant allowance contributions toward build-out
Industrial Lease LOI
Industrial spaces (warehouses, manufacturing) require different considerations:
Clear heights, docks, and loading areas
Triple-net expenses (tenant covers CAM, taxes, insurance)
Minimal landlord improvements—often “as-is”
Longer lease terms (5–10 years) due to tenant investment
Ground Lease LOI
Ground leases are unique because the tenant typically constructs its own building on the landlord’s land. Terms are long (20–50 years) and highly negotiated:
Rent applies only to the land, with tenant funding the improvements
Permitted use defined narrowly to fit the tenant’s business plan
Reversion of improvements to the landlord at lease end
Flexibility for financing and construction rights
Renewal options to secure long-term control
Why the LOI Matters
A well-drafted LOI:
Saves time by surfacing deal-breakers early
Provides leverage for both sides during negotiations
Helps brokers and attorneys draft the final lease more efficiently
Prevents misunderstandings about financial commitments, delivery condition, or future rent escalations
Final Thoughts
While it may feel like “just a letter,” the Letter of Intent sets the tone for the entire lease negotiation. Office tenants focus on improvements and services, retail tenants zero in on exclusivity and co-tenancy, industrial tenants prioritize functionality, and ground lease tenants negotiate long-term land control.
In every case, the LOI is the critical first handshake that ensures landlord and tenant are on the same page before moving to the legally binding lease.