Understanding the Commercial Lease Letter of Intent: Key Business Terms to Address Before the Lease Is Drafted

In most commercial leasing transactions, the parties begin negotiations with a Letter of Intent (“LOI”) or term sheet before drafting a formal lease agreement.

Although the LOI is usually technically non-binding, it frequently establishes the core economic and business terms that will ultimately be incorporated into the lease. As a practical matter, the LOI often becomes the roadmap for the transaction. Time spent negotiating the LOI at the outset can materially reduce legal costs and delays once counsel is engaged to prepare the formal lease documentation.

What Is a Commercial Lease LOI?

A commercial lease LOI is a preliminary document outlining the fundamental business terms of a proposed lease transaction. These documents are often negotiated by the parties’ business principals and leasing brokers before either party’s attorney becomes heavily involved in the transaction.

The LOI is not intended to function as a substitute for the lease. Rather, it provides a high-level framework for preparation of the lease agreement by setting forth the principal economic and operational terms of the deal.

Once the LOI has been executed, counsel for the landlord will typically prepare the initial lease draft consistent with the agreed-upon LOI terms.

Core Business Terms Typically Addressed in an LOI

Although the level of detail varies from transaction to transaction, most commercial lease LOIs address the following business points:

Premises

The LOI should clearly identify:

• The specific space to be leased
• The approximate rentable square footage
• The location of the premises within the building or project
• The tenant’s permitted use of the premises

Lease Term

The LOI will typically address:

• Length of the initial lease term
• Target commencement date
• Any renewal or extension options

Where renewal options are contemplated, the LOI should specify whether renewal rent will be determined based on a fixed schedule or fair market value methodology.

Rental Rate

Most LOIs will outline:

• Initial base rent
• Annual rent escalations
• Whether the lease will be structured as a gross lease, modified gross lease, or triple net lease
• Tenant’s obligation to reimburse operating expenses or real estate taxes

Because these terms drive the economics of the transaction, careful attention should be paid to their treatment at the LOI stage.

Tenant Improvements

In transactions where tenant improvements are required, the LOI should address:

• Scope of landlord’s work
• Amount of any tenant improvement allowance
• Construction timeline
• Responsibility for cost overruns

Failure to address these issues early may lead to disagreements during lease drafting, particularly where buildout obligations are material.

Free Rent and Other Concessions

The LOI may also provide for:

• Rent abatement periods
• Moving allowances
• Early access or early occupancy rights

These concessions are often negotiated based on tenant credit and market conditions.

Financial Terms and Leasing Economics

Additional financial provisions commonly included in an LOI may address:

• Security deposit requirements
• Allocation of operating expenses
• Real estate tax reimbursements
• Utility costs
• Responsibility for brokerage commissions

Expansion, Contraction, and Transfer Rights

Depending on the nature of the tenancy, the LOI may also address:

• Expansion options
• Rights of first refusal or first offer on adjacent space
• Contraction rights
• Early termination options

Similarly, the LOI may outline whether the tenant will have the right to assign the lease or sublease the premises, subject to landlord consent.

Binding vs. Non-Binding Provisions

Although LOIs are generally intended to be non-binding with respect to lease terms, certain provisions may nevertheless be enforceable if drafted as binding obligations.

These provisions may include:

• Confidentiality
• Exclusivity (or “no-shop”) obligations
• Agreements to negotiate in good faith
• Broker commission provisions

Massachusetts courts will typically look to the language of the LOI to determine whether the parties intended to be legally bound by any of its provisions. An LOI that lacks a clear statement of non-binding intent—or that includes sufficiently definite economic terms—may create enforceable obligations notwithstanding the parties’ expectation that no binding agreement exists until execution of the lease.

Transition from LOI to Lease

Once the LOI has been executed, the landlord’s attorney will usually prepare the initial lease draft. In most cases, the lease will track the business terms outlined in the LOI.

Attempts by either party to renegotiate agreed-upon LOI terms during lease drafting can delay execution and increase transaction costs. Accordingly, both landlords and tenants should ensure that the LOI accurately reflects their understanding of the transaction before execution.

Conclusion

Although often viewed as a preliminary document, the commercial lease LOI establishes the roadmap for the lease negotiation process. Careful attention to LOI terms at the outset—particularly with respect to rent, tenant improvements, and renewal rights—can help minimize disputes and streamline preparation of the final lease agreement. For commercial landlords and tenants alike, investing time in negotiating a clear and comprehensive LOI may help avoid more costly negotiations later in the transaction.