LOI vs Lease: Key Differences and Why Both Matter

What Is a Letter of Intent?

A Letter of Intent, also called an LOI, is a non-binding document that outlines the principal business terms of a proposed commercial real estate lease. It is the opening move in virtually every CRE transaction, serving as the framework both parties agree to before anyone engages attorneys to draft a full lease.

A typical LOI runs 2 to 5 pages and covers the core deal points: the premises, the lease term, the base rent and escalation structure, the tenant improvement allowance, operating expense responsibilities, the security deposit, free rent concessions, renewal options, and any special conditions specific to the deal. It is deliberately concise. The goal is to capture the business understanding between the parties, not to address every legal contingency.

The LOI is almost always non-binding on its substantive terms, which means that signing it does not obligate either party to execute the lease. This is by design. Both sides want the flexibility to walk away if the lease negotiation reveals issues that could not have been anticipated at the LOI stage. The LOI represents a good-faith agreement to negotiate toward a lease on the outlined terms, but it is not the lease itself.

That said, the LOI carries enormous practical weight. Once both parties sign, they have psychologically committed to the deal. Walking away from a signed LOI is legally permissible but relationally damaging. Brokers, attorneys, and principals all treat the signed LOI as the baseline, and any attempt to renegotiate terms after signing is met with resistance and eroded trust.

What Is a Commercial Lease?

A commercial lease is the binding legal contract that governs the landlord-tenant relationship for the duration of the occupancy. Where the LOI is a handshake, the lease is the enforceable agreement.

A typical commercial lease runs 30 to 80 pages or more, depending on the property type and deal complexity. A single-tenant industrial lease might be on the shorter end. A multi-tenant retail lease in a lifestyle center with percentage rent, co-tenancy provisions, exclusive use clauses, and detailed common area maintenance obligations can easily exceed 100 pages with exhibits.

The lease translates the business terms from the LOI into precise legal language and then adds dozens of provisions the LOI never addressed. Default and remedies, insurance requirements, subordination and attornment, estoppel certificates, environmental compliance, ADA obligations, casualty and condemnation procedures, signage rights, parking allocations, and much more. These provisions are where the real complexity lives, and they are where most lease negotiations stall.

Every provision in the lease is binding. Once both parties execute the document, they are legally obligated to perform according to its terms for the entire lease period. Breaking a 10-year commercial lease has consequences that can include liability for the entire remaining rent obligation, forfeiture of the security deposit, and personal exposure if a guaranty is in place.

LOI vs Lease: A Side-by-Side Comparison

Understanding the core differences helps both parties approach each document with the right mindset.

• Length: An LOI is typically 2 to 5 pages. A lease runs 30 to 80 pages or more with exhibits.
• Binding nature: The LOI is generally non-binding on business terms, with a few exceptions. The lease is fully binding and enforceable in court.
• Level of detail: The LOI addresses 10 to 15 major business points. The lease addresses every conceivable scenario, from who replaces the HVAC compressor to what happens if the building is condemned.
• Who drafts it: The LOI is usually drafted by the landlord or listing broker. The lease is drafted by the landlord's attorney.
• Cost to produce: Drafting an LOI costs little to nothing beyond broker time. Drafting a lease costs $3,000 to $10,000 or more in legal fees.
• Time to negotiate: A well-prepared LOI takes 1 to 2 weeks. A lease takes 4 to 8 weeks when things go smoothly.

These differences explain why the LOI exists in the first place. Nobody wants to spend $10,000 on attorneys before confirming that both sides agree on the rent. The LOI settles the economics so the lease can focus on the legal framework.

The Timeline from LOI to Executed Lease

Understanding the standard timeline helps both parties plan resources and set expectations.

Week 1 to 2: LOI Negotiation

The initial LOI is drafted (usually by the landlord or listing broker), sent to the tenant's side, and redlined. Most LOIs go through 2 to 3 rounds of revisions before both parties sign. This phase should take one to two weeks for a straightforward deal. If your LOI negotiation is dragging past three weeks, something is wrong with either the document or the relationship. For guidance on the redlining process, see our detailed walkthrough.

Week 2 to 4: Lease Drafting

After the LOI is signed, the landlord's attorney drafts the lease using the LOI as the instruction set. This typically takes 10 to 15 business days. The attorney translates the business terms into legal language and adds all the standard provisions that the LOI did not cover. The quality of this draft depends entirely on how clear and complete the LOI was.

Week 4 to 6: Tenant Review and First Redline

The tenant's attorney reviews the draft lease against the signed LOI and marks up every provision that deviates from the agreed terms, is missing from the LOI but unfavorable to the tenant, or contains non-standard language. This review typically takes 5 to 10 business days.

Week 6 to 8: Landlord Response and Final Negotiation

The landlord's attorney responds to the tenant's redline, and the parties negotiate the remaining open items. In an ideal scenario, this takes one to two rounds of revisions and the lease is executed within 60 days of the signed LOI.

When It Goes Wrong: 90 to 180+ Days

When the LOI is vague, incomplete, or poorly negotiated, the lease drafting phase becomes a second full negotiation. Issues that should have been settled in the LOI are now being debated by attorneys billing $300 to $600 per hour. Every ambiguous LOI provision generates a round of lease comments, a phone call between counsel, and another round of revisions.

Which LOI Provisions Are Typically Binding?

While the LOI is generally non-binding, three categories of provisions almost always carry legal weight.

Confidentiality

Both parties agree not to disclose the terms of the negotiation to third parties. This protects the landlord from having proposed deal terms shared with competing tenants and protects the tenant from having their expansion or relocation plans made public before they are ready.

Exclusivity Period

The exclusivity clause, sometimes called a "no-shop" provision, prevents the landlord from negotiating with other tenants for the same space during a defined period, typically 30 to 60 days. This gives the tenant confidence to invest in due diligence, space planning, and legal fees knowing the landlord will not give the space to someone else mid-negotiation.

Broker Commission Acknowledgment

The LOI typically identifies the brokers involved and acknowledges which party is responsible for paying the commission. This provision is binding because brokers rely on it to establish their right to compensation. Disputes over broker commissions are among the most common in CRE, and a clear, binding acknowledgment in the LOI prevents most of them.

Why Getting the LOI Right Prevents Costly Lease Negotiations

The single most predictable driver of expensive, drawn-out lease negotiations is a poorly drafted LOI. Every gap in the LOI becomes a battleground in the lease. Every ambiguous term becomes an opportunity for one side to claim a different interpretation. Every missing provision becomes a surprise insertion that the other party did not anticipate and will not accept without a fight.

Consider the financial math. An LOI negotiation typically involves broker time and possibly a few hundred dollars for a professional review. Fixing a term at the LOI stage costs almost nothing. Fixing that same term at the lease stage involves attorneys on both sides, multiple rounds of redlines, and weeks of delay. At $400 per hour per attorney, a single disputed provision can generate $2,000 to $5,000 in legal fees before it is resolved.

Now multiply that by the 5 to 10 provisions that a weak LOI leaves unresolved. You are looking at $10,000 to $50,000 in unnecessary legal costs, plus the opportunity cost of a deal that takes 120 days to close instead of 45. For a thorough list of provisions every LOI should address, review the LOI checklist.

A Real-World Scenario: The Weak LOI That Cost Six Months

A regional landlord received an LOI from a national restaurant franchisee for a 3,200-square-foot endcap unit. The LOI covered the basics: rent at $32 per square foot NNN, a five-year term with one five-year option, and a $40 per square foot tenant improvement allowance. The landlord signed it within a week, eager to fill the vacancy.

The lease drafting revealed everything the LOI failed to address. The LOI said nothing about the TI disbursement process, so the tenant's attorney insisted on a construction escrow with third-party oversight, adding $4,500 in administrative costs. The LOI did not mention HVAC specifications, so a dispute erupted over whether the landlord's existing rooftop unit was adequate for a restaurant use. The LOI omitted any reference to grease trap maintenance, exhaust hood requirements, or operating hours, all provisions that are standard in restaurant deals.

The LOI also used vague language on the exclusivity provision, saying the tenant would have "exclusive rights to operate a restaurant." The landlord's attorney argued this meant only the specific restaurant concept. The tenant's attorney argued it prohibited any food-service use in the entire shopping center. That single ambiguity generated three weeks of negotiation and over $8,000 in combined legal fees.

The deal that should have closed in 45 days took nearly six months. The landlord lost five months of rent on the vacant space, roughly $53,000 at $32 per square foot on 3,200 square feet annualized. The tenant spent an additional $15,000 in legal fees beyond their original budget. A thorough LOI that addressed restaurant-specific provisions would have prevented virtually all of these costs and delays.

The Cost Difference: LOI Stage vs. Lease Stage

The economics are stark. Here is what it typically costs to resolve a disputed term at each stage:

• At the LOI stage: 15 to 30 minutes of broker or advisor time per provision. Total cost to fix 5 open issues: $200 to $500.
• At the lease stage: 2 to 8 hours of attorney time per provision, on each side. Total cost to resolve 5 open issues: $8,000 to $30,000 or more.

That is a 40x to 60x cost multiplier for addressing the same issue at the lease stage instead of the LOI stage. This is why experienced CRE professionals treat the LOI as the most important document in the deal, not the least. For a deeper look at specific provisions that landlords frequently miss, see 10 LOI Mistakes That Cost Landlords Thousands.

How to Ensure Your LOI Covers What Matters

Use a Comprehensive Checklist

Do not rely on memory or templates you have not updated in three years. Use a current, property-type-specific checklist that covers all material provisions. The LOI provisions checklist covers the 15 categories that every commercial LOI should address.

Get a Professional Review Before Signing

Whether you are the landlord or the tenant, have your LOI reviewed by someone who redlines these documents regularly. A broker with 20 years of experience will catch issues that a general practice attorney might miss, and vice versa. The best approach combines market knowledge with legal awareness.

Address Property-Type-Specific Issues

A retail LOI needs to cover percentage rent, co-tenancy, exclusive use, and signage. An industrial LOI needs to address yard storage, loading docks, clear height, and environmental compliance. An office LOI should specify after-hours HVAC rates, parking ratios, and building standard finishes. Generic LOIs that ignore property-type nuances create problems in the lease.

Use AI to Benchmark and Validate

Tools like CREagentic can analyze your LOI against market standards for the specific property type and geography in about 60 seconds. This gives you an instant baseline to identify provisions that are below market, above market, or missing entirely. At $2 per analysis, there is no reason to send or sign an LOI without running it through a professional review first.

The Bottom Line

The LOI and the lease serve fundamentally different purposes, but they are deeply connected. The LOI is your 2 to 5 page business agreement. The lease is your 30 to 80 page legal contract. Getting the LOI right does not guarantee a smooth lease negotiation, but getting the LOI wrong virtually guarantees a painful one.

Invest the time and resources at the LOI stage. Review every provision against market standards. Address property-type-specific issues before they become lease-stage surprises. Use professional tools and advisors to validate your terms. The cost of thorough LOI preparation is measured in hundreds of dollars. The cost of a weak LOI is measured in tens of thousands.