What is a Letter of Intent and Why Should It Be Used?
In the world of commercial real estate, whether you’re leasing a space for your growing business or acquiring property as part of your expansion or exit strategy. A Letter of Intent (LOI) is one of the most valuable deal tools at your disposal. But what exactly is an LOI, and why does it matter?
What is a LOI?
A LOI, or Letter of Intent, is a preliminary document that outlines the key deal terms of a proposed real estate transaction or lease. It’s typically nonbinding when it is properly drafted with the appropriate legal disclaimers and is used to capture the core deal terms before committing to a full Purchase and Sale Agreement (PSA) or Lease Agreement.
Think of it as a handshake in writing or a document of terms that helps both sides see if they’re aligned before spending time (and legal fees) drafting a full contract.
Key Components of an LOI
A professionally prepared LOI should address the following elements:
- Nonbinding Clause
A clear statement that the LOI is nonbinding (unless certain sections are specified as binding, such as confidentiality or exclusivity).
- Defined Parties
Names and contact details of the buyer/tenant and the seller/landlord.
- Authorized Signers
Identification of who has the authority to execute the LOI.
- Property Description
Full address and legal description of the property.
- Price or Rent Structure
The proposed purchase price or rental terms (rate per SF, NNN vs gross, escalations, etc.).
- Expense Allocation
Outline of who pays for various costs such as closing costs, title, survey, commissions, tenant improvement allowance, etc.
- Delivery & Rent Commencement
Timing of property delivery or rent commencement.
- Timing and Dates
Key dates such as inspection period, closing date, and possible extension terms. For a lease the lease terms and any extension options would be included.
- Broker Disclosure
Name(s) of brokers representing each party and commissions expectations.
Why Use an LOI?
A LOI brings structure to lease or purchase negotiations. Here’s why it should typically come first:
- Faster Negotiation: LOIs are less formal and easier to revise than full contracts.
- Avoids Early Legal Costs Too Soon: Why pay attorneys to redline 40-page documents if the deal isn’t even close? Get the business terms right first.
- Improves Clarity: A LOI lets both parties focus on economic terms before diving into legal language.
- Foundation for the Formal Contract: Once approved, the LOI gives the drafting party or legal team a clear direction on what terms to include in the draft contract.
Protect Your Intent and Avoid Costly Expenses
The use of a LOI would prevent unintentional commitments by a party. While terms of a deal could be negotiated via email, if a tenant or buyer is not careful there is risk that they could bind themselves to the terms written in an email. Sometimes it is easy to get careless in texts or emails and not fully disclose the intent of a party.
The use of a LOI keeps the negotiations on track. If the landlord or seller is using a lease or PSA prepared by legal counsel a LOI can also reduce avoidable attorney revisions on both sides. Once the terms in the LOI are accepted, they’re easily included in a Lease or PSA. While there will still be legal review, most of the negotiation at that point will focus on language and structure not economics.
A Real-World Example
In a recent transaction I was involved in, a buyer insisted on using a Contract as their offer rather than starting with an LOI. Each time we adjusted the term, price, closing date, or inspections we had to revise and re-sign the entire contract. It was inefficient and time-consuming. Had we used an LOI, the negotiation may have moved more smoothly, with lower risk and fewer document headaches.
Final Thought
If you are leasing or buying a commercial property especially for your business operations, a Letter of Intent isn’t just helpful, it’s strategic. It saves time, reduces legal expenses, and builds alignment faster.
Have questions about when and how to use a LOI in your transaction? Let’s talk. I specialize in helping business owners move forward with clarity and confidence.
