An LOI is a letter of intent: a short document that sets out the main terms of a commercial lease or a property sale before the lawyers write the contract. A tenant or a buyer usually sends it to the owner, and both sides sign it once they agree.
The LOI lets the two sides settle the business terms before they pay for legal drafting. The contract follows it: a lease for a tenant, or for a buyer a purchase and sale agreement (PSA), which fixes the price, the deposit and the closing date. Our leasing guide shows where the LOI sits among the steps to lease commercial real estate.
The Texas Real Estate Research Center at Texas A&M University published a guide to commercial LOIs in 2003. It lists the business terms an LOI covers: "timing, monetary terms, financing, deal contingencies, risk allocation, form of documentation and who will prepare the documentation" (Texas Real Estate Research Center).
A broker usually writes the letter of intent. The Texas guide describes the practice: "Most LOIs are drafted by the broker or agent representing the buyer in a sale transaction. Either the tenant or landlord in a leasing transaction may draft an LOI."
A broker knows the market's rents, and a lawyer knows which words create a contract, so ask one to read the clauses that bind.
Canadian brokers often use an offer to lease for the same purpose as a lease LOI. Quebec's real estate brokerage regulator, the OACIQ, treats the names as near synonyms: "the leasing offer may be referred to as a preliminary contract, a promise to lease or a letter of intent" (OACIQ, commercial offer to lease).
Read what the document says about itself: an offer to lease often states that it becomes a binding agreement once the landlord accepts it, while an LOI often calls itself non-binding.
A letter of intent should include the parties, the property, the money terms, the dates, the conditions and a clause that says which parts bind. A lease LOI and a purchase LOI share that frame and fill it with different terms.
| Part | LOI to lease | LOI to purchase |
|---|---|---|
| Parties | Tenant, landlord and any guarantor | Buyer and seller |
| Property | The premises and their area | The land and the building |
| Money | Base rent, yearly increases, operating costs, security deposit | Price and deposit |
| Dates | Possession date, lease term, renewal options | Due diligence period, closing date |
| Conditions | Landlord's work, improvement allowance, free rent, permitted use | Financing, inspections, title review |
An LOI for a commercial lease states the rent, the term and what each side builds or pays before opening day. Four terms carry most of the money:
- Base rent. The yearly rent per square foot, before operating costs.
- Lease type. It decides who pays the building's taxes, insurance and maintenance. See what NNN means in a lease and what CAM charges cover.
- Tenant improvement allowance. The sum the landlord pays toward building out the space.
- Free rent. The months at the start of the term when the landlord waives the base rent.
A letter of intent to purchase real estate states the price, the deposit, the due diligence period, the financing condition and the closing date. Due diligence is the period in which the buyer inspects the building, reads the leases and reviews the title.
The seller's broker often sets the date for LOIs in the offering memorandum, the package that presents the property to buyers. Once both sides sign the LOI, the lawyers draft the contract, and our investing guide explains what a PSA is in commercial real estate.
Most letters of intent state that their business terms are non-binding and that a few clauses bind both sides: exclusivity, confidentiality and each side's costs. The Texas guide explains how a judge reads one: "Courts evaluate the intent of the parties when determining whether a provision is legally binding, so clarity is essential."
| Clause | Usual status | What it does |
|---|---|---|
| Rent or price | Non-binding | States the figure the contract will fix |
| Term, options and allowances | Non-binding | Outlines the deal for the lawyers |
| Exclusivity | Binding | Takes the property off the market for a set period |
| Confidentiality | Binding | Keeps each side's information private |
| Costs | Binding | Leaves each side to pay its own advisers |
| Expiry | Binding | Ends the LOI on a set date |
The table shows common drafting, and each LOI decides for itself. The Texas guide of 2003 gives two drafting habits. First, put each binding clause "in a separate section of the document to make it clear that it is an independent, legally binding obligation" (Texas Real Estate Research Center, binding provisions). Second, drop vague phrases: "Ambiguous language such as 'subject to legal documentation' or 'subject to attorney approval' should not be used." Such language, the guide warns, "may result in a binding agreement".
An agreement to negotiate in good faith is a promise to keep working toward a contract, honestly, for a stated period. A US appeal court ruled on one in a dispute over a store lease.
On December 11, 1984, the home improvement chain Channel Home Centers sent a detailed letter of intent for a store in Cedarbrook Mall, in a suburb of Philadelphia. Frank Grossman, who was buying the mall, signed it. The letter said he would "withdraw the Store from the rental market, and only negotiate the above described leasing transaction to completion". On February 6, 1985, he told Channel that negotiations had ended. The next day he leased the space to a competitor of Channel.
The US Court of Appeals for the Third Circuit ruled in 1986 that such a promise can bind an owner "for a reasonable period of time" (Channel Home Centers v. Grossman). Two facts weighed in the ruling: the tenant had spent "significant sums of money" on the negotiation, and the letter was "of significant value to the property owner". The court applied Pennsylvania law, reversed the trial judge's finding that "there was no enforceable agreement" and sent the case back for trial.
A sentence that promises exclusive negotiation can be a contract term, whatever the document's title says.
In Canada the answer starts with the province's legal system. The Supreme Court of Canada addressed bargaining before a contract in Martel Building Ltd. v. Canada, a common-law dispute over the renewal of an office lease in Ottawa. The Court wrote in 2000 that "a duty to bargain in good faith has not been recognized to date in Canadian law", and it left the question "for another time" (Supreme Court of Canada, Martel Building).
Quebec's private law rests on a civil code, and the code states a general duty. Article 1375 reads: "The parties shall conduct themselves in good faith both at the time the obligation arises and at the time it is performed or extinguished" (Civil Code of Québec).
The two systems start from different texts, so ask a lawyer in the property's province how each one applies to your LOI.
A commercial lease lasts for the term its LOI names, and that term "can range from month-to-month to several years", says the Business Development Bank of Canada (BDC, lease duration). The term line looks small on the page, and it multiplies every other number in the LOI.
Take a new shop that signs an LOI for 2,500 square feet at $30 a square foot. The landlord offers three months of free rent, and the rent rises 3% a year. Every figure in this example is an assumption. On free rent, BDC says: "It's common for landlords to offer two or three months rent free."
| Line | Five-year term | Ten-year term |
|---|---|---|
| Base rent in year 1 | $75,000 | $75,000 |
| Base rent in the last year | $84,413 | $97,858 |
| Base rent over the term | $398,185 | $859,791 |
| Free rent, three months | $18,750 | $18,750 |
| Base rent you commit to | $379,435 | $841,041 |
Doubling the term more than doubles the commitment, because each added year costs more than the last. The table counts base rent alone. Under a net lease, the tenant's share of taxes, insurance and maintenance comes on top.
About half of new US business locations close within five years: of the private-sector establishments that opened in the year to March 2015, 50.2% were still open in March 2020 (BLS, establishment survival). The first year takes the largest share: 79.6% were still open in March 2016. Ten years on, 34.7% were still open in March 2025.
The US Bureau of Labor Statistics (BLS) counts establishments, and an establishment is usually a single location. Closed locations are a broader group than failed businesses: an owner can also retire, relocate or merge two sites.
Source: U.S. Bureau of Labor Statistics, Business Employment Dynamics, Table 7, private-sector establishments opened in the year ended March 2015, counted each March to 2025.
In the example, a ten-year term commits a new business to $841,041 of base rent, over a span that about one new location in three outlasted.
A personal guarantee is the owner's own promise to pay what the company owes under the lease if the company stops paying. A landlord often asks a new business for one, and the request usually first appears in the LOI. The guarantee can turn the total in the table into a personal debt, so the term and the guarantee belong in the same negotiation.
Tenants commonly ask for three limits at the LOI stage:
- A cap on the guarantee, in dollars or in months of rent.
- An end date, after a set number of years of on-time rent.
- A shorter first term with options to renew.
BDC makes the case for the third: "If you're uncertain about near-term needs, consider a shorter lease (for example, two or three years)." Brett Prikker, a business centre manager at BDC, names the price: "You may pay more per square foot for a shorter lease, but at least you can walk away more easily if you need to."
An LOI is short, and its numbers run for years. Add up the rent over the full term, mark which clauses bind, and have a lawyer where the property sits read it before you sign.