Drafting a Letter of Intent for Commercial Property for Rent: A Step-by-Step Guide

Drafting a Letter of Intent for Commercial Property for Rent: A Step-by-Step Guide

Securing commercial property for rent requires careful negotiation and documentation. Before signing a full lease agreement, many landlords and tenants use a Letter of Intent to outline the basic terms of their proposed arrangement. This document serves as a roadmap for the lease negotiation process, helping both parties understand expectations and avoid costly misunderstandings.

A Letter of Intent (LOI) is a preliminary agreement that captures the essential business terms of a commercial lease. While typically non-binding in most respects, certain provisions such as confidentiality and exclusivity clauses may be legally enforceable. Understanding how to draft this document properly can save your business time, money, and potential legal complications down the road.

Why Use a Letter of Intent for Commercial Leases

The LOI serves several practical purposes in commercial real estate transactions. First, it allows both parties to confirm they are aligned on major terms before investing significant time and legal fees into drafting a comprehensive lease. Second, it demonstrates the tenant's serious interest in the property, which can be particularly important in competitive rental markets. Third, it provides a framework that attorneys can use when preparing the formal lease documents.

For businesses seeking commercial property for rent, the LOI stage is your opportunity to negotiate favorable terms without the pressure of a binding contract. You can address rent amounts, lease duration, tenant improvement allowances, and other critical business points while maintaining flexibility to walk away if negotiations stall.

Essential Components of a Commercial Property Letter of Intent

A well-drafted LOI for commercial property for rent should include several key elements. Start with a clear identification of the parties involved, including the legal names of the landlord and tenant entities. Specify the property address and describe the exact space being leased, including square footage and any common areas or parking spaces included.

The proposed lease term is fundamental. State the anticipated start date, lease duration, and any renewal options. For example, you might propose a five-year initial term with two five-year renewal options. This gives your business long-term stability while providing flexibility for future growth or relocation.

Rent structure deserves detailed attention. Include the base rent amount, whether quoted as monthly rent or per square foot annually. Address how rent will escalate over time, whether through fixed annual increases, percentage increases, or adjustments tied to the Consumer Price Index. Also specify who pays for utilities, property taxes, insurance, and maintenance costs, as these can significantly impact your total occupancy expenses.

Structuring the Financial Terms

Beyond base rent, your LOI should address the security deposit amount and conditions for its return. Many commercial leases require deposits equal to one to three months' rent. Clarify whether this deposit will earn interest and under what circumstances the landlord may apply it to damages or unpaid rent.

If you are seeking a tenant improvement allowance, the LOI is the place to negotiate this benefit. Specify the dollar amount per square foot the landlord will contribute toward customizing the space for your business needs. Address who will manage the construction process and how any cost overruns will be handled.

Free rent periods or rent abatement should also be documented. Many landlords offer one to three months of free rent to offset your moving costs and business interruption. Clearly state when this free rent period begins and whether it applies only to base rent or also to additional charges.

Use and Occupancy Provisions

Your LOI should describe the permitted use of the commercial property for rent. Be specific about your business operations to avoid future disputes. If you operate a restaurant, specify whether you will serve alcohol, have live music, or operate a drive-through window. For retail operations, address signage rights, hours of operation, and any exclusivity provisions that prevent the landlord from leasing to your direct competitors.

Address assignment and subletting rights in your initial proposal. Most landlords restrict these rights, but you may negotiate for reasonable flexibility to assign the lease if you sell your business or to sublet portions of the space if your needs change.

Contingencies and Conditions

Include appropriate contingencies that must be satisfied before you commit to the lease. Common contingencies include:

• Satisfactory completion of due diligence, including property inspection, environmental assessment, and review of existing leases and property restrictions
• Obtaining necessary permits, licenses, and zoning approvals for your intended use
• Securing adequate financing for your business operations and any required tenant improvements
• Review and approval of the formal lease agreement by your attorney

Specify reasonable timeframes for satisfying each contingency. This protects your interests while demonstrating good faith to the landlord.

Binding vs. Non-Binding Provisions

Most Letters of Intent include explicit language stating that the document is non-binding except for specific provisions. Typically, confidentiality obligations, exclusivity periods, and the responsibility for costs incurred during negotiations are binding even when the overall LOI is not.

An exclusivity provision prevents the landlord from negotiating with other potential tenants for a specified period, usually 30 to 90 days. This gives you time to complete due diligence and negotiate the formal lease without worrying that another tenant will secure the space. Be realistic about the exclusivity period you request, as landlords are often reluctant to take their property off the market for extended periods.

Clearly state which party will bear the costs of drafting the lease agreement. In many commercial transactions, the tenant pays for lease preparation, though this is negotiable. Also address who pays for any required environmental assessments, surveys, or other due diligence costs.

Timeline and Next Steps

Your LOI should establish a clear timeline for moving from preliminary agreement to executed lease. Specify when you expect to receive the first draft of the formal lease agreement and set a target date for lease execution. Building in reasonable deadlines keeps the process moving forward and signals your commitment to the transaction.

Include a provision addressing what happens if the parties cannot reach agreement on the final lease terms. Typically, either party can walk away without liability, though any binding provisions in the LOI remain enforceable.

Practical Drafting Tips

When drafting your Letter of Intent for commercial property for rent, use clear and concise language. Avoid legalese that might confuse the business terms you are trying to establish. The LOI is a business document first and a legal document second.

Be thorough but not overly detailed. The LOI should cover all material business terms but leave the fine legal points for the formal lease agreement. Trying to negotiate every minor provision at the LOI stage can slow the process and create unnecessary friction.

Consider using a template as your starting point. A Letter of Intent to Renew Commercial Lease template can provide useful structure and ensure you do not overlook important provisions. However, customize any template to reflect the specific terms of your transaction and the unique characteristics of the commercial property for rent.

Common Pitfalls to Avoid

Several mistakes can undermine your LOI and complicate lease negotiations. First, avoid vague language about critical terms. Stating that rent will be "market rate" or "negotiated later" defeats the purpose of the LOI. Pin down specific numbers and terms wherever possible.

Do not assume terms that are not explicitly stated. If property tax increases or common area maintenance charges are not addressed in the LOI, you cannot assume they will be favorable in the final lease. Address all significant cost items upfront.

Be cautious about creating unintended binding obligations. If you want the LOI to be non-binding, state this clearly and conspicuously. Review the document carefully to ensure you have not used language that could be interpreted as creating a binding commitment.

Resist the temptation to rush through the LOI stage. While you want to move quickly to secure desirable commercial property for rent, taking time to negotiate a comprehensive LOI will make the formal lease drafting process much smoother.

Working with Legal Counsel

Even though the LOI is typically non-binding, having an attorney review your draft before submission is wise. Legal counsel can identify potential issues, suggest protective language, and ensure the document accurately reflects your business objectives. This relatively small investment can prevent much larger problems during lease negotiation or after you occupy the space.

Your attorney can also advise on market standards in your area. Commercial lease terms vary significantly by region, property type, and market conditions. Understanding what is typical for comparable commercial property for rent in your market strengthens your negotiating position.

After the Letter of Intent

Once both parties sign the LOI, the real work begins. Use the agreed timeline to complete your due diligence promptly. Inspect the property thoroughly, review all relevant documents, and confirm that the space meets your operational needs. If you discover issues during due diligence, address them immediately with the landlord.

Stay engaged in the lease drafting process. The formal lease will include many provisions not covered in the LOI, and you need to ensure these additional terms are acceptable. Work closely with your attorney to review each draft and negotiate any problematic provisions.

Maintain open communication with the landlord throughout the process. A collaborative approach to resolving issues that arise during lease negotiation will serve you well throughout your tenancy. Remember that you are not just securing commercial property for rent, you are establishing a long-term business relationship with your landlord.

By following this step-by-step approach to drafting a Letter of Intent, you position your business for successful lease negotiations and a positive landlord-tenant relationship. The time invested in creating a comprehensive, well-structured LOI pays dividends throughout the lease term and helps ensure your commercial space supports your business objectives.

How do you make a letter of intent binding for commercial real estate?

To make a letter of intent binding for commercial property for rent, you must clearly state which provisions are legally enforceable. Typically, letters of intent are non-binding, but specific clauses can be made binding by using explicit language such as "the parties agree that the following provisions are binding and enforceable." Commonly binding provisions include confidentiality obligations, exclusivity periods, and deposit or earnest money terms. Each binding section should be clearly identified and separated from non-binding terms like proposed rent amounts or lease duration. Both parties must sign the document, and it should specify governing law. Consider consulting legal counsel to ensure enforceability and avoid unintended obligations that could complicate negotiations or lead to disputes before finalizing the lease agreement.

What exclusivity terms should you include in a commercial property LOI?

Exclusivity terms prevent landlords from negotiating with other tenants during a defined period, protecting your time and investment in due diligence. Specify an exclusivity period, typically 30 to 90 days, giving you adequate time to complete inspections, secure financing, and finalize lease terms. Clearly state that the landlord agrees not to solicit or entertain offers from other parties for the same commercial property for rent during this window. Include consequences for breach, such as reimbursement of your due diligence costs. Balance the exclusivity duration with the landlord's concerns by offering reasonable timelines and demonstrating serious intent. This provision ensures you negotiate in good faith without competing interests undermining your position.

How long should your commercial lease letter of intent negotiation period be?

The negotiation period in a commercial property for rent letter of intent typically ranges from 30 to 90 days, depending on the complexity of the deal. For straightforward leases with standard terms, 30 to 45 days is often sufficient. However, if your transaction involves extensive due diligence, tenant improvements, or complex financial structures, you may need 60 to 90 days. This timeframe allows both parties to conduct property inspections, review financials, and negotiate lease terms without unnecessary pressure. Be realistic about what you can accomplish within the period, and consider including a provision for extending the deadline by mutual agreement if needed. Setting a clear but reasonable negotiation window demonstrates professionalism and helps maintain momentum toward finalizing your commercial lease agreement.

Genie AI: The Global Contracting Standard

At Genie AI, we help founders and business leaders create, review, and manage tailored legal documents - without needing a legal team. Whether you're drafting documents, negotiating contracts, reviewing terms, or scaling operations whilst maintaining a lean team, Genie's AI-powered platform puts trusted legal workflows at your fingertips. Try Genie today and move faster, with legal clarity and confidence.