How to Write a Letter of Intent (LOI) to Lease Commercial Property (Step-by-Step Guide and Free Sample in .pdf and .doc)
In this guide I will show you how to create a letter of intent (LOI) for a commercial real estate lease. We will discuss:
- the purpose of a letter of intent
- planning your letter for the most effective negotiation
- how to write each section of your letter, step-by-step
- if letters of intent are really nonbinding
You will also find a sample of a letter of intent for commercial rentals and leases of retail space, offices, and other properties.
Let’s start with the purpose of the letter of intent.
The Purpose of the Letter of Intent
The letter of intent is the precursor to the commercial real estate lease. It shows a prospective landlord you have a serious interest in leasing the property and initiates the negotiation process. It affords both parties an opportunity to negotiate terms before they are legally binding. It is easier and less costly than negotiating a lease, which is legally binding.
The letter of intent gives you leverage. It can require a landlord to stop marketing the property to others during negotiations. Since you are not legally bound, the landlord may be more motivated to offer favorable terms to secure the transaction.
With no legal obligations and no required upfront deposit, you can offer an LOI to multiple property owners at the same time and choose the one that offers the best terms.
Before Writing: Identify Your Points of Negotiation
Writing your LOI requires due diligence. During your pre-offer commercial real estate due diligence period, you will need to gather as much information about the property as possible. You need to know all the details about the property so you know what modifications and services to request in your negotiations.
For example, if it is a shared office building, who pays for the utilities? Who maintains the property? Is parking available nearby? What potential is there for branding, signage, and expansion? If you are trying to lease commercial retail space, is there enough parking for your customers?
You will need a solid understanding of your business needs in relation to the property. How many square feet do you need? How many parking spaces do you need? What modifications or accommodations would your business need in order to operate?
You also need to consider your business finances. What kind of annual revenue does your business generate? What is your annual rent budget? Does your budget allow for maintenance expenses, or will you need the landlord to cover these?
Visit the property and compare its characteristics with your business needs. If you already lease commercial space, you can use your current lease to guide you and negotiate changes where your current lease is inadequate or where property differences exist.
For example, if you are leasing commercial retail space, you can negotiate the landlord’s contributions to the necessary improvements needed to operate your business. You may need extra restrooms, updated lighting, and fixed shelving for your merchandise.
You can negotiate how much the landlord will pay and whether the landlord pays contractors directly, gives you an upfront allowance, or offers a rent abatement. Addressing this in a letter of intent will quickly show you whether the location is feasible or you need to move on..
Tenant improvements can cost the landlord hundreds of thousands of dollars. A lease term of only five years may not allow the landlord to make back his investment. A lease term of 20 years would. During negotiations, if you need to increase landlord contributions, try increasing the length of your lease term.
Doing your homework and making sure you include as many points of negotiation as possible will help you avoid unpleasant surprises when it is time to review and sign your lease. The lease is binding and often requires review by an attorney. You will save time and money by including all these points in your LOI and completing those negotiations ahead of time.
If you are a startup or this is your first time leasing commercial space, you can use the next section of this article to guide you on the specific points of negotiating. Just remember to customize where needed.
How to Write a Letter of Intent for a Commercial Lease: Step-by-Step Guide
Your letter of intent should outline the terms and conditions you hope to receive in a future lease agreement. Don’t be afraid to ask the landlord to be generous. The landlord will most likely counter your original offer. You will be in the best bargaining position if you make your intentions clear from the beginning.
Before you begin, make sure you know the facts about the property, such as the approximate square footage, zoning restrictions, number of parking spaces, and name of the owner. You can get some of this information from your local tax assessor or by talking to the landlord.
If you do rely on public records for your information, be aware that the square footage may not be accurate. It is not uncommon to have conversations with the landlord prior to delivering a letter of intent. If the landlord knows you have a serious interest, you may be able to get the landlord to provide the information you need.
You can write the letter of intent using your company’s letterhead and logo, if you have one. Format your LOI similarly to a lease. Divide it into sections as outlined below and use formal language. Spell out dollar amounts, and place the numeric versions and symbols in parenthesis. For example: One hundred dollars ($100).
Step 1: The Heading
Use a heading to indicate that this is a letter of intent to lease. This can be centered or left-aligned at the top of the page, but it needs to be larger than the rest of your text so it stands out from the rest of the text.
You can use wording such as “Letter of Intent to Lease,” “Commercial Lease Letter of Intent,” or something similar, as long as the language makes it clear that this is not a lease agreement, but a letter of intent to lease. This is an important distinction, since a lease would be legally binding.
Step 2: The Date
This may seem obvious, but it is easy to overlook. Always start your letter of intent with the date you will deliver the letter to the landlord. This can become important later. For example, if any portion of the letter of intent is binding, the date will show when it went into effect.
When writing the date, use full, unabbreviated words and numbers, rather than using slashes or dashes. For example, write January 31, 2022 rather than 01/31/22. This is clearer and more formal.
Step 3: Introduction
This step is optional, but recommended. In one short paragraph, describe your company. Talk about what your company does, who you serve, your company mission if you have one, how long you have been in business, and any other distinguishing information about your business.
If your business is already well-known in your area, you could skip this step. If you are a startup or just not well-known, include this paragraph. Just be careful not to make it too long. Three to four sentences is plenty.
Step 4: The Lessee
The Lessee is your business, the entity that would lease the commercial space if negotiations are successful. Use the name that would appear on a future lease, usually your business name. Make sure you include LLC or Inc., in your company name, if applicable.
If your corporate name is different from your dba, you will need to indicate this, for example, “ABC Enterprises LLC, dba ABC Consulting.” If you wish to refer to your business as “ABC Consulting” throughout the letter of intent, you should mention that here.
For example, you could say, “ABC Consulting and ABC Enterprises LLC will be used interchangeably throughout this letter.” Or you could say, “ABC Enterprises LLC dba ABC Consulting will be hereinafter referred to as tenant.”
This can be helpful if the landlord is familiar with your company and already knows you by your dba. If the landlord is not already familiar with you, it may be easier to use your proper corporate name in your letter of intent and ultimately, in your lease.
Step 5: The Lessor
The lessor is the landlord. If the landlord is an individual, you can just write the landlord’s full name here. If the landlord is a business, write out the full business name. You can clarify this during negotiations if you are unsure. You can also include a statement that the (landlord’s name) will be referred to as landlord.
Step 6: The Property
This is where you define the property you intend to lease. Always start with the property address. Describe the property or portion of the property you intend to lease. Include the square footage of the building or portion of the building you intend to occupy.
For complicated properties with shared space or multiple buildings, if necessary, include drawings of the property with the portions you intend to lease clearly marked.
If you are unable to get square footage information about the property you wish to lease, you can specify that you will stop pursuing a lease of the property if the square footage is below your specified minimum.
Specifying the square footage helps prevent misunderstandings about which space you are leasing. If you assume the landlord knows you mean the whole building, but there is a separate room on one end of the building, the landlord might assume you mean the whole building except this part. It is best for the landlord to know in this early stage exactly what you intend to lease.
If your LOI is for an office space in a shared building, you will need to specify which space you are interested in. You can usually specify this with a suite number. The square footage is also important in this instance because some office spaces may use temporary walls that are not fixed.
If you intend to lease commercial real estate that includes two or more adjacent spaces, make sure you include the total square footage of all the spaces and all the suite numbers. While this may seem obvious, specifying this will help ensure you and the landlord are negotiating the same space.
Office space lessees often share common areas, such as restrooms, lobbies, and meeting rooms. These will be addressed in another section, but you can mention these here and specify that common area space is not to be included in square footage calculations and that your company and your patrons will have access to these areas..
Be sure to include the parking lot if you intend to lease commercial retail space, or the number of parking spaces you will need for an office space.
Here is an example of how this section could be written:
The premises are located at 123 Main Street, Suites 3400-3403, Anytown, USA. The landlord shall agree to make available these suites: 3400, 3401, 3402, and 3403. These suites are located on the northeast corner of the third floor and shall include 412 net rentable square feet each, for a total of 1,648 square feet.
Elevators, restrooms, lobbies, and hallways shall be deemed common areas and shall not be included in square footage calculations.
Landlord shall agree to designate four (4) parking spaces at the east entrance of the building for the tenant’s staff, and a total of eight (8) additional parking spaces for guest parking. Designated parking spaces should be as close to the building as possible.
Step 7: Lease Term
This is where you tell the landlord how long you could agree to be bound under the terms of a future lease. This can be one sentence. Include the length of time, the date such a lease might commence, and the date it would expire.
Step 8: Lease Renewal (or Option to Renew)
This is optional. If you anticipate that upon expiration of a future lease, you would want the option to renew before the space is marketed to the public, you would include this section. Mention how many times you would have the option to renew and how much notice you would need to give the landlord if you choose to exercise this option.
Step 9: Use of Leased Premises
Indicate that the premises would only be used for business purposes by your company and your customers. This section only requires one sentence and reassures the landlord.
Step 10: Rent (or Base Rent)
Use this section to propose a monthly or annual rent amount, depending on how often your company would pay. Include the days rent payments would be due (for example, on the first of every month). Address how rent would be paid for partial months (it is usually prorated). You will also need to specify whether the rent could increase during the course of the lease or upon renewal.
If the rent could increase, you will need to specify how much, how often, what events would trigger a rent increase, and any limits on how much the rent can increase.
For longer lease terms, the landlord may insist a periodic cost of living increase be included, but you could negotiate the length of time between increases and the maximum amount the rent can increase. When writing your LOI, offer a reasonable rental amount without suggesting rent increases. Let the landlord be the one to bring this up.
Step 11: Prepaid Rent (or Security Deposit)
This section is optional, but many landlords want to see some investment from the tenant when a lease is signed. If you plan to ask for rent abatement for tenant improvements, you could offer a security deposit or skip this section.
If you plan to offer a few months of prepaid rent or a security deposit, specify the amount, how it would be credited, and whether any portion would be refundable.
Step 12: Late Rent
This section is not always included. Specify the consequences of a late rent payment. If there is a grace period, define the number of days. Mention any late fees that would apply after a late rent payment. Some landlords charge a fee per day. Try to offer a flat rate and see if the landlord will accept it.
Step 13: Expenses
This is where you specify who would pay expenses related to the commercial space. This includes building maintenance, janitorial services, parking lot and sidewalk maintenance, and other expenses relating to the building. This will vary based on the type of space.
Designate the landlord as the party that would pay for all of these expenses. Do not offer to pay any in your initial LOI. It is not unusual for the landlord to pay most of these expenses. You can compromise later if necessary, but you will be in the strongest position if you offer the terms that are ideal for you.
Try to anticipate every type of expense that could occur. If you leave anything out, it could come up when it is time to sign the lease. This would make the negotiation more tense and possibly more expensive. Or worse, you could end up stuck with the expense.
Possible expenses include:
- Janitorial services
- Upkeep of bathrooms, lobbies, and other common areas
- Parking lot repairs and maintenance
- Snow removal in parking lot and sidewalks
- Structural repairs, such as roof leaks
- HVAC air filters, maintenance, and repairs
- Replacement of worn carpets or flooring
- Electrical issues
- Utility bills (water, electric, cable, internet, phone)
This is not an exhaustive list. Careful inspection of the property prior to starting your LOI will help you anticipate possible expenses specific to the location.
Step 14: Subletting/Assignment
Use this section to tell the landlord whether you would have the right to sublet any portion of the premises to a third party. If you do include the right to sublet, it will reassure the landlord if you include language that states liability under the lease would still remain with you as the tenant. You could also specify that the business will be compatible with yours.
Assigning the lease to another business is less common. If you do not intend to do this, include a provision that states the tenant shall not assign the lease to a third party without prior authorization from the landlord.
If you wish to reserve the right to assign the lease to a third party, specify the type of business you would assign the lease to, whether this would be permanent, who would be in charge of insurance, your degree of liability, and the nature of your ongoing relationship with the landlord.
Step 15: Tenant Improvements
This is where you tell the landlord what changes would need to be made to the commercial space to make it functional for your business. This could include floor plan changes, additional fixtures, furnishings, and changes to the grounds.
If the property is acceptable as is, you can leave this section out. Most likely, you will need at least one or two improvements, even if it is just cleaning or updating paint.
Specify what improvements will be made at the landlord’s sole expense, and set a deadline. You would also need to go over the process of making these changes.Ideally, include professional drawings and blueprints of the changes with your LOI.
Include how the work will be completed and how the landlord will pay for the work. Will the landlord pay you an allowance, or will the landlord pay the contractors directly? Who will supervise the work, and what level of involvement do you need? You can specify that all plans and contractors would have to be approved by you before work could proceed.
Here are some examples of common improvements landlords provide:
- The addition of office cubicles
- Fixed or movable shelving
- The addition of a bathroom or kitchen
- Addition of a drop ceiling
- Updated interior or exterior lighting
- Installation of HVAC systems or updates to existing systems
- Fresh paint
- New flooring
- The addition of a security system
- Parking lot painting or re-design
Try to anticipate everything. You are in a better bargaining position negotiating from your LOI than you would be negotiating this while trying to finalize the lease.
Step 16: Early Occupancy
This section is not always included. You may be in a situation where you need access to the property prior to your lease commencement date to secure services or install equipment. Specify the number of days prior to the beginning lease date you would need to access the space.
Include the reason why you would need early access to the property. This will help the landlord understand when to have the property ready for your transition.
Step 17: Right to Expand/First Rights of Refusal
This section is optional. If you share an office building with other tenants, or if the landlord owns additional sites, you can request first rights of refusal. For example, if an office space adjacent to yours becomes available, you could require the landlord to offer the space to you before marketing it to others.
In your LOI, be specific about the circumstances under which you would have the first right of refusal. Make sure you also mention that the additional space would be offered on substantially the same terms that would be provided on your future lease.
Step 18: Parking
This section addresses parking spaces. This section is optional. You could include this information in the property section instead. Include this section if you have a lot of terms you want to negotiate with regards to parking.
If you want to ask for improvements to the parking lot, that should be addressed in the tenant improvements section. If you use this section, state the number of parking spaces you need and where those spaces should be located.
Make sure you include parking for all employees, yourself, and your guests/customers. Some landlords charge a fee for parking spaces. You do not have to include this in your LOI, but be prepared for the landlord to counter on this point.
Step 19: Signage
This section can be used to designate the landlord as the provider of a building sign, suite sign, and/or directory sign at the landlord’s sole expense. The exact signage required would depend on the type of property.
If you will be leasing an entire building or a portion of a building, for example as a large retail store, you may want to include language that states the building will be publicly known and listed under your company’s name.
If you already know the landlord is not going to provide signage, this section should still be included. In this case, you would state that your company will provide the signage at your expense.
Step 20: Rent Abatement
This section is optional. Use this section to request free rent for a number of months. Often, a period of free rent is negotiated later in exchange for the tenant taking on some of the tenant improvements. Sometimes, in a competitive market, a landlord will grant this concession just to make the lease more desirable.
This section only has to be one sentence long. The sentence would simply specify the number of months rent would be free.
Step 21: Insurance
This important section defines who would bear liability for losses that occur on the property, and the amount of insurance that would be required. This section should be at least two paragraphs long. One paragraph should address the tenant responsibilities, and the other the owner’s.
Address the amount of liability insurance you would carry. This will vary based on your industry. This insurance would cover losses experienced by visitors on the property that are caused by any aspect of your business. You should also mention that you would provide insurance to cover your personal property.
The next paragraph should mention that the landlord agrees to maintain insurance on the building and to assume responsibility for any losses that happen due to any aspect of the building systems or the grounds.
This would also be where you would mention your recourse as a tenant in the event the building becomes unusable or is destroyed. Typically, this would be grounds for you to terminate the lease.
Step 22: Relocation Expense
This section is optional, but worth negotiating if your business is already established at another location. The cost of relocating a business can be significant. If your relocation costs are going to be high, include this section.
Specify a dollar amount the landlord would provide towards relocation and how the owner should pay this to you. It could be cash, a rent credit, or any other concession that would benefit your specific situation.
Include a statement that you will have the right to hire contractors of your choosing for relocation services.
Step 23: Good Faith
This is an optional section, but recommended. You can just write one sentence stating both parties agree to negotiate in good faith.
Step 24: Other Provisions
Any terms that do not fit into other sections can be listed here. For example, you can add a clause that states the landlord will stop marketing the property while negotiating this LOI.
You can also add that both parties will keep all information confidential.
Step 25: Binding Effect
This section is important. This is where you specify which parts of the LOI, if any, are legally binding. This is best accomplished by stating, “Both parties understand and agree this Letter of Intent is not a lease and is not legally binding.” You could go on to state that the agreement is just a basis to negotiate the terms of a later agreement.
You could make part of the LOI binding. For example, you could state that section 24 is legally binding upon both parties, meaning both parties are legally bound to keep all facts confidential, and the landlord is legally bound to stop marketing the property during negotiations.
Do not leave this part out. The absence of this section could put you in a position where you are legally bound to all the provisions here before you have had a chance to fully inspect the property.
Step 26: Governing Law
This section should always be included, but you can keep it down to one sentence. It simply states which laws govern the LOI. Usually, this would be the state where the property is located.
Step 27: Expiration Date
The expiration date is a deadline for when negotiations should be completed. Defining an expiration date will ensure the landlord will respond promptly to your LOI and to each stage of the negotiation. For example, you could set the LOI to expire on a certain date if the lease is not executed, or if construction has not begun by that date.
Step 28: Signatures
This is the final section of the LOI. Be sure to include room for you and the landlord to sign, date, and print your names.
Once this is signed, negotiations begin. Neither you nor the landlord are legally bound to continue with the contract unless the LOI states otherwise or other situations exist. This will be the topic of the next section.
Is a Letter of Intent Really Nonbinding?
The letter of intent is generally regarded as non-binding, but there are circumstances that could make it binding. It is always a good idea to have a commercial real estate attorney or professional commercial real estate broker review your Letter of Intent. If that is not an option, there are a few specific pitfalls to avoid.
First, make sure you include a clear, non-ambiguous statement that the letter of intent is not a lease, that it is nonbinding, and that its purpose is to begin negotiating to form a future agreement.
Even if you include language stating the LOI is non-binding, it can still become binding. Avoid using language within the LOI that could imply it is a legally binding agreement. Try not to refer to the LOI as an agreement, instrument, or lease anywhere in the text. It is a letter. You can mention a future lease. Just make sure you are not referring to the LOI as a lease or implying that the lease is presently in force.
Do not start performing any of the actions mentioned in the LOI. Many courts view performance of the terms in the LOI as a conversion to a binding agreement. This would defeat the purpose of the LOI.
The LOI is meant to be a low-risk way to spell out your preferred terms and start the negotiation process from a strong bargaining position. As long as you write your LOI thoroughly and carefully, it is the strongest, simplest, and safest method to begin a commercial real estate lease negotiation.
Free Sample of a Letter of Intent to Lease Commercial Space (.pdf and .docx Templates)
Below are the links to download a sample of an LOI to lease commercial real estate. Please note that this template is basic. You may need to customize it according to your points of negotiation described above.
The folder contains two files: PDF and DOCx: