In commercial real estate, deals are rarely documented in final form on the first attempt. Before lawyers draft the purchase agreement or lease, before due diligence begins in earnest, and before either party commits significant time and money to a transaction, the parties typically exchange a letter of intent — universally abbreviated as LOI. The letter of intent is a written summary of the key economic and structural terms both parties are prepared to agree to in principle, subject to negotiation of a definitive contract.
Used in both acquisitions and leasing transactions, the LOI is one of the most consequential documents in a commercial deal despite often being only a few pages long. Understanding what it covers, how binding its provisions are, and how to approach negotiations strategically is essential for anyone active in commercial real estate.
What a Letter of Intent Is — and What It Is Not
A letter of intent is a pre-contractual summary of agreed deal terms, drafted early in a transaction to confirm that both parties are aligned on key economic points before either invests heavily in full documentation. It is not a contract — it does not obligate either party to close. But it is not merely an informal conversation either. A well-drafted LOI creates a clear framework that shapes every subsequent negotiation, and in some provisions, it creates legally binding obligations.
The distinction between binding and non-binding provisions is the most important legal concept in any LOI. Most substantive economic terms — purchase price, closing date, contingencies, lease rates, tenant improvement allowances — are explicitly stated to be non-binding and subject to execution of a definitive agreement. However, certain procedural provisions are typically drafted as binding commitments from execution: confidentiality obligations, exclusivity periods (often called "no-shop" clauses that prevent the seller from marketing to other buyers), and provisions governing cost allocation if the deal does not proceed.
This hybrid structure reflects commercial reality. Neither party wants to be legally bound to close a deal that due diligence has not yet validated, but both parties benefit from binding commitments on process matters — particularly the buyer's interest in exclusivity during due diligence, and the seller's interest in keeping deal terms and property information confidential from competitors.
Core Terms Covered in an Acquisition LOI
Purchase Price and Financing Structure
For acquisition LOIs, the purchase price is the central term. The LOI states the proposed purchase price, the deposit amount — typically referred to as earnest money — its timing relative to LOI execution, and the basic financing structure. The LOI may specify whether the buyer intends to pay all cash or secure mortgage financing, and if financed, on what general terms.
For example, a buyer might propose a $5,000,000 purchase price with a $150,000 earnest money deposit delivered within five business days of LOI execution, with the balance funded through a combination of equity and a senior loan. The LOI may specify that the acquisition is contingent on the buyer securing acceptable financing, or it may be an all-cash proposal with no financing contingency — the latter being a meaningful competitive advantage in a seller's market.
Due Diligence Period
The due diligence period — the window during which the buyer inspects the property, reviews financial records, examines title, and conducts environmental and physical assessments — is specified in the LOI. It might range from 30 days for a straightforward single-tenant property to 90 days or more for complex portfolios or properties with complicated tenancy histories.
During this period, the earnest money deposit is typically fully refundable if the buyer elects to terminate. After the due diligence period expires, a portion or all of the deposit typically becomes hard (non-refundable), representing the buyer's serious commitment to proceed toward closing.
Contingencies
Key contingencies that must be satisfied before closing are identified in the LOI. Common contingencies in commercial transactions include:
- Due diligence contingency: The buyer's right to terminate for any reason during the inspection period.
- Financing contingency: Subject to the buyer securing satisfactory loan terms.
- Entitlement or zoning contingency: For development deals, approval of required land use changes.
- Tenant estoppel contingency: The buyer's right to receive signed estoppel certificates from existing tenants confirming that lease terms are as represented.
- Environmental contingency: Freedom from material contamination that would impair use or value.
The scope and duration of contingencies is heavily negotiated. Sellers prefer fewer contingencies with shorter duration; buyers prefer broad protection with adequate time for thorough diligence. The presence of a financing contingency in particular signals a buyer's risk level to the seller — sophisticated sellers in competitive markets often favor buyers who can close without financing contingencies.
Exclusivity and No-Shop Provisions
Buyers strongly prefer a binding exclusivity clause prohibiting the seller from soliciting or entertaining competing offers during the due diligence period. This protection is essential: it would be commercially unreasonable to spend significant funds on inspections, legal fees, environmental studies, and loan applications while the seller simultaneously runs a parallel negotiation with another buyer.
Sellers may accept exclusivity for a defined period — commonly 30 to 60 days — in exchange for the buyer's commitment to move diligently and a meaningful earnest money deposit that becomes non-refundable if the buyer fails to perform on the agreed timeline without valid cause. The binding nature of the exclusivity provision is therefore one of the key seller protections negotiated in the LOI.
Core Terms Covered in a Lease LOI
For lease LOIs, the core economic terms are quite different from acquisition terms but equally important to negotiate carefully at the LOI stage:
Base rent: The initial rent per square foot and the total monthly and annual obligation.
Lease term: The duration of the initial term and the terms of any renewal options, including whether options are at fair market rent or at a predetermined rate.
Rental escalations: Annual fixed increases (commonly 2% to 3% per year) or CPI-linked adjustments.
Tenant improvement allowance: The landlord's cash contribution toward building out the space for the tenant's use, expressed as a dollar amount per square foot of rentable area.
Free rent period: Months of rent abatement during the build-out period, before the tenant is open for business or fully operational.
Permitted use: The activities the tenant is expressly permitted to conduct within the leased premises — important for exclusivity arrangements in retail settings and for zoning compliance.
Operating expense structure: Whether the lease will be gross, modified gross, or net, and what categories of expenses will be passed through to the tenant as additional rent.
For example, a lease LOI for a professional services office tenant might propose a seven-year initial term at $42 per square foot in year one with 3% annual rent escalations, a $75 per square foot tenant improvement allowance, four months of free rent during construction, two five-year renewal options at fair market rent, and a modified gross lease structure with the tenant responsible for utilities and a proportionate share of operating cost increases above a base year.
Understanding the full cost implications of different lease structures — particularly a triple-net lease versus a gross or modified gross structure — is critical at the LOI stage, because agreeing to a lease structure without understanding its total cost impact means that the real financial commitment only becomes apparent after execution.
The Role of an LOI in Shaping Final Negotiations
A well-negotiated LOI does more than memorialize agreed terms — it establishes each party's negotiating position for the detailed contract discussions that follow. A seller who concedes a 75-day due diligence period in the LOI will find it practically and reputationally difficult to shorten it during contract drafting without appearing to re-trade the deal. A buyer who agrees to a purchase price without a financing contingency in the LOI has signaled that capacity to the market and will face resistance if they attempt to reintroduce financing risk later.
For this reason, experienced commercial real estate attorneys consistently advise clients to negotiate LOI terms with the same rigor they would apply to the final contract. The psychological momentum of an agreed LOI makes it genuinely difficult to significantly revise economic terms in subsequent negotiations without creating friction, eroding trust, or risking deal collapse entirely.
This principle applies equally to lease LOIs. A tenant who agrees to a particular tenant improvement allowance in the LOI and then seeks a larger allowance in lease negotiations is effectively re-trading — a dynamic that landlords view unfavorably and that can complicate the final leasing process.
Binding vs. Non-Binding: Key Legal Considerations
The binding or non-binding nature of an LOI depends on its explicit language and, in some jurisdictions, on the subsequent conduct of the parties. Courts in various jurisdictions have found enforceable contracts where LOIs did not clearly disclaim binding effect — particularly when one party expended significant resources in reliance on the LOI's terms while preparing to close.
To protect both parties, a well-drafted LOI should:
- Expressly and clearly state which provisions are non-binding and subject to execution of a definitive agreement.
- Identify specific provisions that are intended to be legally binding — most importantly, confidentiality, exclusivity, and cost allocation.
- Include a clear termination mechanism specifying what happens to earnest money deposits under various termination scenarios.
- Avoid language suggesting a binding obligation to negotiate in good faith toward completion, which some courts have interpreted as an enforceable duty with legal consequences.
Parties who proceed as if the deal is already done — publicly announcing a transaction, ordering custom materials, or beginning construction — before a definitive agreement is fully executed take on real legal and financial risk if the deal subsequently collapses.
Practical Guidance for Buyers, Sellers, and Brokers
For buyers: Approach the LOI as a strategic document that establishes your negotiating position, not an administrative formality. Negotiate the terms that matter most — exclusivity duration, contingency language, earnest money refundability conditions — before signing. The time spent on LOI negotiations is far less expensive than dispute over those same terms during contract drafting.
For sellers: Evaluate inbound LOIs not only on offered price but on the terms that indicate genuine buyer capability and commitment. A higher purchase price from a buyer with unlimited contingencies, a minimal earnest money deposit, and a 90-day due diligence period may be less valuable than a modestly lower offer from a well-capitalized buyer with tight contingencies and a substantial hard deposit that makes them genuinely committed to the transaction.
For brokers: Your value in LOI negotiations extends well beyond facilitating communication between parties. Brokers who understand the mechanics of exclusivity provisions, hard-money timelines, contingency structures, and earnest money forfeitures can steer clients away from provisions that create legal risk, economic exposure, or deal uncertainty — adding real value that justifies the representation.
For all parties: Retain experienced real estate counsel before signing. An LOI that appears simple — two or three pages of bullet points — can contain binding provisions with significant consequences and non-binding provisions whose absence of protection only becomes apparent when a dispute arises. Independent legal advice before signing protects all parties from misunderstandings about what the document actually commits them to.
The letter of intent is where commercial real estate transactions are framed, leveraged, and sometimes won or lost before anyone fully recognizes it is happening. Parties who understand its mechanics and negotiate it with appropriate seriousness consistently achieve better outcomes than those who treat it as a placeholder for the real negotiations yet to come.
One final practical point: the LOI also serves as a communication tool within each party's own organization. A well-structured LOI allows a buyer's investment committee, lender, or equity partner to quickly evaluate the proposed terms and provide approval to proceed. For a tenant, it allows the executive team to sign off on the leasing commitment before legal fees accumulate. Writing the LOI clearly — with economics organized logically and key terms plainly stated — speeds internal approvals and reduces the risk that misunderstandings surface only after weeks of lawyer-billed negotiation time have elapsed.