The letter of intent, or LOI, is a short document that sets out the main business terms of a lease before the lease itself is drafted. It is usually non-binding: either side can walk away until a lease is signed. That makes it tempting to treat as a formality. It is not.

Why the letter of intent matters

Most of what makes a lease good or bad for a tenant is decided at the letter of intent. Once terms are agreed there, reopening them during lease drafting is slow and costs goodwill. The lease document turns the letter's terms into detailed language; it rarely improves them. So the time to negotiate is now, with your broker and, for significant transactions, your attorney involved.

Most of what makes a lease good or bad for a tenant is decided at the letter of intent.

Premises, term and commencement

The premises clause identifies the space: the building, the suite or floor, and the rentable and usable areas. Ask how the space was measured and confirm the figures, because they drive rent and your share of operating expenses for the whole term.

The term clause sets the length of the lease. The commencement clause sets when the term and rent begin, which may be a fixed date, the date the landlord delivers the space or the date you open for business. Be clear about the difference between the delivery date, when you get access, and the rent commencement date, when payments start. If the landlord is building improvements before you move in, negotiate what happens if delivery is late: rent credits, extended free rent or, beyond a long delay, a right to terminate. If you are building, negotiate early access for cabling and furniture installation without starting rent.

Rent, operating expenses and concessions

The rent clause states the starting base rent and the escalations, whether a fixed percentage, a fixed amount or an index-based adjustment. It also states the lease structure: full service gross, modified gross or net. For a gross lease, check the base year; for a net lease, ask for current estimates of taxes, insurance and common-area maintenance.

The operating expense provisions deserve more attention than they usually get in an LOI. Points worth settling now include a cap on increases in controllable expenses, the exclusion of capital costs that only benefit the landlord, how management fees are calculated, and your right to audit annual reconciliations. A sentence in the letter of intent on each of these saves a long debate later.

Free rent, or abatement, is stated as a number of months and should say whether it covers base rent only or operating expenses too. The tenant improvement allowance is stated as an amount per square foot or a total. Negotiate how it can be used: some letters limit it to hard construction costs, others allow it for design, cabling, furniture or moving. Ask whether any unused amount can be credited against rent, and how long you have to use it.

The work letter sets who designs and builds the space. In a turnkey arrangement, the landlord delivers an agreed scope at its cost. With an allowance, you or the landlord manage construction and the landlord funds up to the allowance. Agree who manages the project, any supervision fee, and how cost overruns are handled.

Options and rights

Options give you choices later in the term, and they are far easier to obtain at the letter of intent than at any other time. The common ones are:

  • Renewal option: the right to extend for one or more further terms, usually at a stated percentage of fair market rent or a defined formula, with a notice window.
  • Expansion option or right of first offer: a chance to take additional space before it is marketed to others.
  • Right of first refusal: the right to match a third party's offer for defined space.
  • Termination or contraction option: the right to end the lease early or give back part of the space, usually with notice and a fee tied to unamortized costs.
  • Assignment and sublease: when you may transfer the lease or sublet, and on what conditions consent can be withheld.

Use, signage, parking and services

The permitted use clause defines what you can do in the space. Make it broad enough for how the business may evolve, and for retail, add any exclusive you need. Signage rights cover building-top, monument, door and directory signs, subject to code and the property's sign criteria. Parking should state the number of spaces, whether they are reserved or unreserved, and their cost for the term.

For office space, the letter should note building hours, after-hours HVAC charges and access arrangements. For industrial space, it should cover yard use, outside storage, trailer parking and any power or equipment the landlord will provide.

Security, credit and contingencies

The security clause sets the deposit, letter of credit or guaranty the landlord requires, which depends on your financial strength and the landlord's investment in the space. Negotiate a reduction schedule: security that steps down after a period of on-time payment.

Finally, the letter lists the conditions both sides need before signing: credit approval, lender consent, board approval, permits for the intended use. It will also state that it is non-binding, often with limited exceptions such as confidentiality. Read it to make sure the non-binding language is clear, and keep in mind that the letter of intent is the blueprint for the lease that follows.

Next steps

Our letters of intent set out the business terms in plain language so they can be negotiated before the lease is drafted. If you are ready to discuss a space, send your requirement through the inquiry form or call +1 (307) 309-3800.

General information for businesses considering commercial space, not legal, tax or financial advice. Every lease is different; your lease's own terms govern.