Letter of Intent in Commercial Real Estate Transactions

A letter of intent in commercial real estate is a preliminary written expression of intent to purchase or lease a property, laying out key terms and conditions before binding contracts are signed. It signals commitment without typically binding the buyer or tenant to a completed transaction, though certain clauses—confidentiality, exclusivity, and expense allocation—often carry legal weight.

Why an LOI exists in CRE

An LOI bridges the gap between initial handshake and legally binding purchase agreement or lease. Preparing a full commercial contract—including environmental due diligence, title examination, and lender underwriting—can take weeks or months and cost tens of thousands of dollars. An LOI lets both parties agree on headline terms (price, property condition, timeline) and necessary protections before those expenses mount.

From the buyer’s perspective, an LOI signals serious intent and justifies the seller’s agreement to take the property off the market during negotiation (exclusivity period). From the seller’s view, it confirms the buyer has capital and a real transaction in mind, not a vague inquiry. For landlords and tenants, an LOI similarly establishes that the tenant can pay and wants the space, and the landlord is willing to negotiate.

Binding vs. nonbinding sections

This is where confusion reigns. An LOI typically contains both binding and nonbinding language within the same document.

Usually nonbinding:

• Purchase price and basic deal structure (ownership percentage split, sale versus lease term)
• Conditions precedent (financing contingencies, board approval, zoning confirmation)
• Representations and warranties regarding property condition, title, environmental status

Usually binding or partially binding:

• Confidentiality and non-disclosure
• Exclusivity (seller agrees not to shop property to other buyers during the LOI period)
• Allocation of third-party expenses (appraisals, surveys, inspections, legal fees)
• Good-faith obligation to negotiate the final purchase or lease agreement
• Termination date and procedures if no binding agreement is reached
• Choice of law and dispute resolution

The trap: parties often assume the entire document is nonbinding, then discover a court has enforced the exclusivity clause against them—or both parties have paid thousands in expenses with no agreement on who pays for what.

The exclusivity period

An LOI usually grants the buyer or tenant an exclusive negotiation window, often 30–60 days. During this window, the seller agrees not to accept other offers or show the property to competing bidders. This protects the buyer’s investment in due diligence.

If the period expires or the buyer terminates, the exclusivity ends. A shrewd seller will negotiate a tighter window, especially in hot markets where holding a property off the market costs real opportunity. If negotiations stall, the parties may extend the exclusivity period by mutual written agreement, though this rarely happens without clear progress.

Breaking exclusivity early—by the buyer withdrawing or the seller’s failure to negotiate in good faith—can expose the breaching party to liability, depending on how the clause reads and which state’s law applies.

Earnest money and expense deposits

In residential real estate, the earnest money deposit is straightforward. In commercial deals, the LOI often specifies who pays for due diligence and holds deposits.

Some LOIs require the buyer to deposit earnest money (nonrefundable in case of buyer’s failure to close, but refundable if financing falls through or a deal-killing contingency triggers). Others split soft costs: the buyer covers title insurance, survey, and Phase I environmental; the seller covers brokerage commissions and property preparation. A third-party escrow agent holds earnest money or shared deposits pending closing.

The LOI must be explicit about these allocations. If it says “each party bears its own costs,” disputes still arise: is the structural inspection the buyer’s cost or does the seller pay because the seller advertised “perfect condition”?

Due diligence and contingency language

The LOI sets the timeline and scope for due diligence. A buyer typically reserves the right to inspect the property, review leases and tenant financials, order environmental reports, and investigate title. The LOI will specify:

• How long the inspection period lasts (14–45 days)
• Which contingencies allow the buyer to walk without penalty (financing, appraisal, environmental findings, zoning change)
• What “material” defects mean (a cracked parking lot versus a failing roof)
• Whether the buyer must notify the seller of walk-away intentions and by what deadline

If the LOI is vague—“buyer has right to cancel for any reason within 30 days”—disputes flare when the buyer tries to exit because the deal no longer appeals, and the seller refuses to release earnest money.

Good-faith negotiation obligations

Courts in some states (notably New York and California) have found that an LOI can create an enforceable duty to negotiate the final contract in good faith. If either party drags its feet, walks away without reason, or introduces surprise terms at the last moment, the other party may sue for damages or seek specific performance.

This is a gray zone. “Good faith” doesn’t mean the seller can’t walk away if the buyer’s financing falls through; it means the buyer can’t claim the deal is “subject to board approval” unless board approval was genuinely contemplated and the buyer made reasonable efforts to obtain it.

In practice, a buyer who has spent $100,000 on environmental reports and legal fees may argue that the seller breached good faith by suddenly increasing the price by 20%. A seller who held the property off the market for two months may claim the buyer breached good faith by demanding a 30-day inspection period extension without reason.

The path to binding purchase agreement

Once the LOI is signed and exclusivity begins, the parties (and their counsel) draft the purchase agreement or lease—a document that is unambiguously binding and enfodies all contingencies, reps, and indemnities that the LOI glossed over.

The purchase agreement will typically reference the LOI by date and party names, then state that it supersedes and replaces the LOI except for [list specific sections]. This carve-out protects confidentiality and cost-sharing obligations that the LOI established.

If the purchase agreement contradicts the LOI on a material point (price, for example), both parties must sign off. If only one party signs the purchase agreement and the other refuses, the LOI may provide a fallback if it was careful to define what happens next—arbitration, mediation, or a return to the original exclusivity terms.

Red flags and common pitfalls

Unsigned LOI. An email or text saying “let’s move forward at $2 million” is not an LOI. Without written agreement, each party’s duties are unclear.

Ambiguous exclusivity. “The seller will make good-faith efforts not to solicit other offers” is vague. Better: “Seller shall not accept, solicit, or engage in discussions regarding alternative offers until [date].”

One-sided termination. An LOI that allows only the buyer to cancel (with earnest money returned) but not the seller is not truly nonbinding—it’s an option.

Expense responsibility left blank. Agreeing on terms but not who pays the $15,000 appraisal fee invites a fight later.

“Subject to” laundry list. If an LOI makes the deal contingent on financing, partner approval, health inspection, market study, and board sign-off, it’s so loaded with outs that the seller should not trust it. A tight LOI lists 2–3 key contingencies and a clear date by which the buyer confirms or exits.

No dispute mechanism. An LOI without arbitration or mediation language forces a full lawsuit over who breached good faith, which defeats the purpose of a quick, low-cost preliminary agreement.

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