How to write a letter of intent for a commercial lease

A letter of intent is two pages that decide most of a lease. It is also, routinely, the document that gets the least attention, because it is not binding and everyone assumes the real negotiation happens later.

The real negotiation happens later on terms the LOI already fixed. A landlord who agreed in the LOI to a 5 percent non cumulative expense cap has to be argued out of a cumulative one. A tenant who never raised the cap has no basis to introduce it in round two, because the response will be that it was not part of the deal.

What belongs in it

An LOI should be specific enough that a lawyer could draft from it and vague enough to fit on two or three pages. In practice that means naming every term that has a number attached.

Premises and measurement. Address, suite, rentable square footage, and the load factor used to get there. Naming the load factor matters because a remeasurement between LOI and lease is a rent increase that shows up as a correction.

Term and commencement. Length in months, target commencement, and how commencement is actually determined: a fixed date, substantial completion of landlord work, or delivery. Include an outside date after which the tenant may terminate if delivery has not occurred.

Base rent and escalations. State the actual rent for every year, not a percentage. "3 percent annual increases" leaves the compounding basis ambiguous. A schedule does not.

Free rent. Months, when they fall, and critically whether abatement applies to base rent only or to base rent and additional rent. On a triple net deal that distinction can be a third of the payment. See rent abatement.

Operating expense structure. Triple net, base year, or full service. Include the estimated year one nets or the base year, the expense cap with its cumulative status, and the pro rata share denominator.

Tenant improvement allowance. Amount per rentable foot, who performs the work, the draw deadline, what costs are eligible, and any landlord supervision fee. See tenant improvement allowance.

Security deposit and guaranty. Amount, form, and any burndown. For the guaranty, say explicitly whether it is full, capped, or a good guy guaranty. This is the single term most worth settling before drafting, because it is the one landlords are least willing to move on once a lease exists.

Options. Renewal with the rent determination method, expansion, right of first refusal, and any termination or kick-out right with its fee formula.

Retail specifics. Permitted use, exclusive use, co-tenancy, percentage rent rate and breakpoint, and signage.

Contingencies. Financing, permits, board approval, franchisor approval, or a satisfactory site inspection. If the deal depends on something, say so now.

The binding and non binding split

Almost every LOI states that neither party is bound to lease until a definitive lease is executed and delivered by both. That is the right default and it should be unambiguous.

Then name what is binding anyway:

• Confidentiality, covering both the terms and the existence of the discussion
• Brokerage, identifying the brokers and who pays
• Exclusivity or a no shop period, if you negotiated one, with a stated duration
• Expenses, usually each party bearing its own
• Governing law

The failure modes are symmetrical. An LOI that says nothing about binding effect risks a court finding an enforceable agreement where the parties intended a term sheet. An LOI that says everything is non binding, including confidentiality and the no shop, gives away the two protections most worth having during drafting.

Terms that are hard to win back later

Some terms are conventional enough that raising them in round two is normal. Others read as reopening the deal.

Nearly impossible to add after the LOI:

• The guaranty form. Moving from a full guaranty to a good guy guaranty mid drafting is a large ask.
• An early termination right. Landlords underwrite the term, and lenders value it.
• Co-tenancy protection in retail.
• An expense cap where the LOI was silent.

Usually fine to negotiate in drafting, because they are mechanics rather than economics:

• Audit rights and the reconciliation timeline
• The assignment consent standard and permitted transfers
• Subordination conditioned on a non disturbance agreement
• Estoppel response windows
• Restoration and surrender scope

The practical implication is to spend LOI effort on the first list and let the second list wait.

Compare the first draft to the LOI, term by term

The first lease draft is prepared by the landlord's counsel from the LOI, and it does not always match. Sometimes this is deliberate, more often it is a form document whose defaults were never adjusted. Either way, the first draft is the cheapest place to fix it.

Run the draft against the LOI line by line before responding to anything else. The recurring drifts: an expense cap that became cumulative, a base year that became the partial commencement year, an allowance draw deadline that appeared out of nowhere, a guaranty exhibit that is a full guaranty despite an LOI saying good guy, and rentable square footage that moved by a couple hundred feet.

That last one is worth calling out. Square footage drives rent, pro rata share, and the allowance if it is quoted per foot. A change from 11,500 to 11,740 rentable feet is two digits and it moves three numbers.

Keep the LOI open through every round

The LOI stops being useful the moment it goes in a folder. Keep it beside every round as the reference for what was agreed, and treat any divergence as an open item rather than a new negotiation. Our guide to reading a redline round covers how to work that comparison efficiently, and CRE Redline will produce a clean LOI as a Word document from the deal terms you enter, so the version everyone is working from is the same one.

An LOI is not legal advice and this is not a form. Have counsel review anything you send, particularly the binding effect language, which is short and consequential.