When negotiating a commercial lease, two documents often come into play: the Letter of Intent (LOI) and the Lease Agreement. While both are important steps in the leasing process, they serve very different purposes. Understanding the difference between the two can help both landlords and tenants navigate negotiations more confidently and avoid misunderstandings.

What Is a Letter of Intent (LOI)?

A Letter of Intent is a preliminary, non-binding document that outlines the basic terms of a proposed lease. It is typically drafted after initial negotiations and is meant to ensure that both parties are on the same page before moving forward with a formal lease agreement.

Common Items Included in an LOI:

• Lease term and start date
• Rental rate and rent escalations
• TI (Tenant Improvement) allowances
• Who pays for operating expenses
• Options to renew or expand
• Basic responsibilities of each party

Although it’s not legally binding in most cases, the LOI shows serious intent and sets the foundation for drafting the actual lease.

What Is a Lease Agreement?

A Lease Agreement is the legally binding contract that governs the relationship between the landlord and tenant. It includes all terms and conditions in full legal detail, and once signed, both parties are obligated to follow it.

Key Features of a Lease:

• Detailed financial obligations (base rent, CAM charges, security deposit, etc.)
• Legal terms, enforcement clauses, and remedies for default
• Use restrictions and compliance requirements
• Maintenance and repair responsibilities
• Insurance requirements and liability provisions
• Dispute resolution procedures

Unlike the LOI, the lease is enforceable in court and contains the full legal language necessary to protect the rights of both parties.

Why You Need Both

While some may think an LOI is unnecessary, it plays a crucial role in streamlining negotiations. It allows the parties to work out the big-picture items before spending time and legal fees drafting a detailed lease. Once there’s agreement on the core terms, those can be transferred into a formal lease, which expands upon them in legally precise language.

Final Thoughts

The Letter of Intent is a roadmap; the Lease is the contract. Both documents are essential parts of the leasing process, but they serve different functions. The LOI helps ensure alignment early on, while the lease locks in the details with legal enforceability.

For anyone involved in a commercial real estate transaction, understanding the distinction between the two can lead to smoother negotiations, fewer surprises, and better long-term outcomes.