Letter of Intent in Leasing: What Small Businesses Need to Know

Signing a commercial lease is one of the biggest commitments your business will make. But before you ever reach the actual lease document, there’s usually an important step in the process: the Letter of Intent (LOI).

If you’re a small business or nonprofit without a dedicated real estate team, the LOI can feel confusing. Is it a contract? Is it binding? Do you even need one? Let’s break it down.

What Exactly Is a Letter of Intent?

A Letter of Intent (LOI) is a short, written outline of the key terms you and the landlord are considering before drafting the full lease. Think of it as a roadmap. It lays out the “deal points” in plain language so both sides can see if they’re aligned.

An LOI is usually non-binding, meaning you’re not locked in yet. However, it sets the stage for your actual lease negotiation—so getting it right matters.

Common elements in an LOI:

• Premises: What space you’re considering (address, suite, square footage).
• Term: How long you’ll lease the space (e.g., 5 years, with an option to renew).
• Rent: Base rent, escalation schedule, and what’s included or excluded.
• Use: What type of business activity is allowed.
• Tenant Improvements (TIs): Build-out allowances or landlord-provided work.
• Operating Expenses (CAM): Who covers maintenance, taxes, and insurance.
• Timing: Expected move-in date or construction timeline.

Why Is an LOI Important?

Without an LOI, you risk jumping straight into a 40–60 page lease without knowing if the fundamentals line up. That can mean wasted time and legal fees.

Benefits of using an LOI:

• Clarity up front: Everyone knows the financial and operational basics.
• Saves time: Lawyers don’t spend hours drafting a lease that doesn’t work for either side.
• Negotiation leverage: Easier to push back on terms before they’re baked into a legal contract.
• Benchmarking: You can compare offers from different landlords on an apples-to-apples basis.

Is an LOI Binding?

In most cases, an LOI is non-binding. That means either side can walk away before signing the actual lease. However, some parts of an LOI can be binding if written that way—for example:

• Exclusivity clauses (landlord won’t market the space to others for 30 days).
• Confidentiality clauses (you agree not to share terms).

Pro Tip: Always read the fine print. If you don’t want something binding, make sure the LOI clearly says “non-binding” in bold.

How to Approach an LOI as a Small Business

Here’s a simple framework for handling an LOI confidently:

1. Focus on the Big Picture

Don’t get lost in legal wording yet. Instead, zero in on: rent, term, improvements, and expenses.

2. Negotiate Before It’s Formal

Push for concessions now—like more build-out allowance or free rent—before the lease draft stage.

3. Keep It Simple

A two-page LOI is usually enough. If it’s longer than 5 pages, it may be creeping into lease territory.

4. Bring in Help Early

A broker or attorney can add major value here. Brokers help benchmark market terms, while attorneys ensure your LOI doesn’t sneak in binding obligations.

Real-World Example

Imagine you’re opening a café. Two landlords offer you similar spaces:

• Landlord A offers $25/sf rent with a $20/sf improvement allowance.
• Landlord B offers $27/sf rent but no allowance.

Without LOIs, you might not catch the real difference until later. With LOIs, you can line up both deals side by side and make a smarter decision before investing in legal review.

Key Takeaways

• An LOI is the blueprint for your commercial lease—it outlines major terms before lawyers draft the full contract.
• Most LOIs are non-binding, but watch out for exclusivity or confidentiality language that may lock you in.
• Use the LOI stage to negotiate and compare options before committing time and money to a full lease.
• Keep your LOI short, clear, and focused on the deal points that matter most.