Commercial Lease Letters of Intent: Where the Deal Is Decided

Tenants often treat the LOI as a formality handled by brokers, then hire a lawyer when the 60-page lease arrives. By then the economics are settled. The landlord’s position, reasonably enough, is that anything not raised in the LOI was not part of the deal, and reopening it looks like bad faith. The leverage runs the other way too: before the LOI is signed, the landlord wants the deal and will trade.

What Belongs in a Commercial Lease LOI

Is an LOI Binding?

Usually not, but that depends on what it says rather than what it is called. New York courts look at the parties’ expressed intent, and a document that reads like a completed agreement can be enforced even with “letter of intent” at the top. Courts also recognize that parties can bind themselves to negotiate in good faith toward a final agreement while leaving the substantive deal open.

Two practical rules follow. First, state clearly that the LOI is non-binding and that no party is obligated until a lease is fully executed and delivered. Second, identify any provisions that are meant to bind, such as confidentiality, exclusivity and the allocation of brokerage, and say so expressly. Mixing the two without labeling them is what produces litigation.

Why the LOI Decides the Deal

Leverage in a lease negotiation peaks before the LOI is signed and declines steadily afterward. Before signing, the landlord is competing for your tenancy and may be carrying vacancy costs every month the space sits empty. After signing, the landlord has taken the space off the market, its broker has reported a deal, and asking to reopen rent or the allowance reads as retrading rather than negotiating.

That asymmetry explains why experienced tenants spend real time on a two-page document and comparatively little on the 60-page lease that follows. The lease negotiation is mostly about risk allocation: casualty, condemnation, assignment standards, default and cure periods. Those matter, but they rarely move the cost of occupancy the way the LOI terms do.

Reading the Economics Behind the Headline Rent

Two LOIs with identical base rent can differ by six figures over a ten-year term. Compare offers on effective rent rather than the quoted number, and account for these variables:

• Free rent. Months of abatement reduce the total, and timing matters: abatement during build-out is worth less than abatement after opening.
• The allowance. A larger contribution reduces your capital outlay, but landlords price it into rent.
• Escalation method. A fixed 2.5% annual increase compounds differently than a porter’s wage formula or a CPI adjustment, and over ten years the gap can exceed a year of rent.
• Operating expense structure. A base year that is artificially low, because the building was partly vacant or recently assessed, transfers costs to you from year two onward.
• Rentable versus usable square footage. Loss factors vary widely in New York buildings, so compare dollars per usable foot, not just the quoted rate.
• Who does the base building work. Bathrooms, HVAC distribution and ADA compliance are expensive, and silence usually means the tenant pays.

A Worked Example: Two Offers, One Space

Two landlords quote the same 3,000 square foot space at $60 per square foot, or $180,000 a year. On the headline the offers are identical. Over a five-year term they are not.

LOI B offers twice the free rent and looks like the more generous deal in the first conversation. It costs about $34,105 more across the term, because a one point higher escalation compounds on every year while the concession is a single event, and because the smaller allowance leaves $60,000 of build-out to fund yourself.

Two practical points follow. Run this arithmetic at the LOI stage, when both numbers are still movable, rather than after lease drafting has started. And watch which lever the landlord is willing to move: free rent and allowance cost them once, while the escalation rate earns for the whole term, which is why it is usually the hardest number to negotiate and the most valuable one to win.

Timing and Practical Sequencing

An LOI negotiation typically runs one to three weeks, and the lease another three to six, longer where a guaranty or build-out is complex. Build that into your schedule: if your current lease expires in four months and you have not signed an LOI, your leverage is already eroding, because the landlord knows you are facing holdover rent. Start the process six to nine months before you need the space, and if you are renewing, start earlier, since a renewal negotiation without a credible alternative rarely produces concessions.

Provisions Worth Making Binding

• Exclusivity (no-shop). The landlord agrees not to negotiate with other prospects for a defined period, often 15 to 30 days, while the lease is drafted. Without it, your LOI can be used to bid up another tenant.
• Confidentiality. Keeps the economics out of the market, which matters in buildings where other tenants will renew.
• Brokerage. States who pays which broker, avoiding a later claim against the tenant.
• Expenses. Each side bears its own costs, unless you have negotiated a contribution toward legal fees.
• Deposit handling. If money accompanies the LOI, say who holds it, on what terms, and when it is returned.

How the Process Usually Runs

1. Proposal. The landlord or its broker circulates terms, often on a building-standard form.
2. Counter. The tenant responds on the points that matter: rent, free rent, allowance, term, options, guaranty, operating expenses.
3. Agreed LOI. Both sides initial or sign a term sheet, with the non-binding language and any binding provisions stated.
4. Lease draft. The landlord’s counsel prepares the lease, which should track the LOI. Compare them line by line, because drafts routinely add terms the LOI never mentioned.
5. Negotiation and signing. Remaining issues are legal rather than economic: assignment, casualty, default and cure, alterations, restoration, and the guaranty form.

Mistakes That Cost Tenants Money

• Leaving the operating expense structure vague. The difference between a base year and a full pass-through can exceed the rent concession you negotiated.
• Agreeing to a guaranty in principle without specifying a good guy structure, a cap, or a burn-off.
• Silence on rent commencement. Tie it to substantial completion of the landlord’s work, not to delivery of the keys.
• Omitting options. Renewal and termination options are cheap to include in an LOI and expensive to add later.
• Accepting “approximately” square footage. Fix the rentable area, or fix the annual rent in dollars rather than per square foot.
• Signing without the non-binding disclaimer, which is how a term sheet becomes an argument.

Renewals: The LOI That Never Happens

Renewal negotiations often skip the LOI stage, which is a mistake. A landlord proposing a renewal at a stated rent is making an offer, and the tenant that simply counters on rent leaves everything else untouched: the operating expense base year stays frozen in an old year or resets unfavorably, the allowance for refreshing the space goes unasked, and the guaranty continues by its own terms into the extended period.

Treat a renewal as a new deal and put the terms in a short term sheet. The items worth raising are a reset base year, a refurbishment allowance, free rent, a termination option in the extended term, and release or reduction of the guaranty given the tenant’s payment history. A tenant that has paid on time for five years has an argument for better terms than it received as an unknown.

Common Landlord Responses and How to Read Them

• “That is our building standard.” Often true for the lease form, rarely true for economics. Building standard rarely survives a competing offer on comparable space.
• “We can do the allowance or the free rent, not both.” A real constraint tied to the landlord’s own returns. Decide which you need more: cash for build-out, or lower cost in year one.
• “We do not negotiate the guaranty.” Usually negotiable in structure even when not in principle. A cap or a burn-off is easier to win than elimination.
• “We need to sign this week.” Sometimes genuine, often a device. If the space has been vacant for months, the urgency is not the landlord’s.

For Landlords

A well-drafted LOI speeds the deal and reduces renegotiation. State the non-binding nature clearly, make exclusivity mutual in duration, require delivery of financial statements and the proposed guarantor’s information before the exclusivity clock starts, and set an outside date after which the LOI expires if no lease is signed. Where the tenant asks for an allowance, condition it in the LOI on the same terms the lease will impose: completion, lien waivers and no default.

From LOI to Lease

When the draft arrives, compare it against the LOI point by point. The items most often changed in the draft are the operating expense definitions, the guaranty form, restoration obligations, the assignment and subletting standard, and the delivery condition. Anything in the lease that contradicts the LOI should be flagged immediately, while the deal still has momentum. For the provisions that most often surprise tenants after signing, see our guides to CAM charges and triple net structures.

Frequently Asked Questions