Commercial Real Estate Letters of Intent: What to Negotiate Before the Contract
| John M. McCormick | Commercial Real Estate, real estate
Quick Answer
A commercial real estate letter of intent (LOI) is a short document that sets out the main business terms of a purchase or lease before the parties invest in a full contract. Most of an LOI is non-binding, but provisions such as exclusivity, confidentiality, and responsibility for costs are often written to be binding. Because the LOI usually becomes the starting point for the contract, price, earnest money, the due diligence period, contingencies, and the closing timeline should be negotiated at this stage, not later.
This article is part of our Legal Guide to Commercial Real Estate in Virginia and North Carolina.
In most commercial deals, the first document that carries real weight is the letter of intent. Once it is signed, everyone expects the contract to follow the same terms. A point you give up in a two-page letter is hard to win back in a forty-page agreement.
This guide explains how commercial real estate letters of intent work for purchases and leases, which provisions are usually binding, which business terms deserve attention, and how practice differs between Virginia and North Carolina.
What is a commercial real estate letter of intent?
A commercial real estate letter of intent is a summary of the deal the parties plan to sign. It may also be called a term sheet or proposal. Its purpose is to answer one question before anyone pays for lawyers, surveyors, or environmental consultants: do the parties agree on enough of the deal to justify a contract?
If the answer is yes, the LOI becomes the outline for the commercial real estate purchase agreement or the lease. Because LOIs are often prepared quickly, sometimes by brokers, they can be vague in exactly the places that cause disputes later. That is why we encourage clients to have counsel review an LOI before signing, even one labeled non-binding.
Is a letter of intent binding?
Often, the answer is “partly.” Most LOIs state that the business terms are non-binding and that no party is obligated until a definitive agreement is signed. Many also include a few provisions the parties intend to enforce right away, such as exclusivity, confidentiality, each party bearing its own costs, and governing law.
Poor drafting creates risk in both directions. A party may argue that the whole document is an enforceable contract, or a party may assume a provision is binding and learn that it is not. A well-written LOI says plainly which numbered paragraphs are binding and that all others are not.
The statute of frauds matters here as well. In Virginia, a contract to sell real estate, or to lease it for more than one year, must be in a signed writing (Va. Code § 11-2). In North Carolina, contracts to sell land and leases exceeding three years must be written and signed (G.S. 22-2). An LOI is a signed writing, which is one more reason to state its non-binding intent clearly.
What business terms belong in a purchase LOI?
For an acquisition, the LOI should address at least:
- Purchase price and how it will be paid (cash, new financing, assumed debt, or seller financing).
- Earnest money: amount, due date, escrow holder, and when it becomes nonrefundable.
- The due diligence period and whether the buyer may terminate for any reason during it.
- Contingencies such as financing, zoning, environmental results, or tenant estoppels.
- Closing date, extension rights, and what extensions cost.
- Seller deliveries: leases, rent rolls, service contracts, surveys, title policies, and environmental reports.
- Allocation of closing costs and the buyer’s right to assign to a new entity.
Buyers planning a tax-deferred exchange should say so. A short statement that each party will cooperate with the other’s 1031 exchange, at no cost or liability to the cooperating party, is common practice. Our article on 1031 exchange legal issues explains why timing matters.
What business terms belong in a lease LOI?
Lease LOIs tend to be longer because the parties will live with the lease for years. Key terms include the premises and how square footage is measured, the term and renewal options, base rent and increases, the lease structure (gross, modified gross, or triple net), tenant improvements and the allowance, permitted use and exclusives, the security deposit, any personal guaranty, and assignment and subletting rights.
Tenants should pay special attention to operating expenses and guaranties, which often cost more over a lease term than small differences in base rent. Our guide to negotiating a commercial lease covers both topics.
Which LOI terms are typically binding, and why do they matter?
The table below summarizes how common provisions are usually treated. Practice varies, and the LOI’s own language controls.
| LOI Term | Typically Binding or Non-Binding | Why It Matters |
|---|---|---|
| Purchase price or base rent | Non-binding | Sets the economic anchor; reopening it later can damage the deal. |
| Earnest money | Non-binding | Determines how much the buyer has at risk and when that risk begins. |
| Due diligence period | Non-binding | Controls the time to investigate and walk away without losing the deposit. |
| Contingencies | Non-binding | Defines what must be satisfied before the buyer or tenant must close. |
| Closing date and extensions | Non-binding | Affects financing, 1031 deadlines, and the seller’s plans. |
| Tenant improvements | Non-binding | Often a major lease cost; vague language leads to disputes. |
| Exclusivity (no-shop) | Often binding | Keeps the seller or landlord from shopping the deal while you spend money on diligence. |
| Confidentiality | Often binding | Protects deal terms and shared financial information. |
| Each party bears its own costs | Often binding | Avoids reimbursement claims if the deal does not proceed. |
| Property access | Often binding | Sets rules for inspections, insurance, and restoration. |
| No obligation until a definitive agreement | Binding | Confirms intent and reduces the risk the LOI is treated as a contract. |
How should exclusivity work?
Without exclusivity, a seller can sign your LOI, wait while you pay for a survey and environmental report, and then accept a better offer. A typical clause sets a fixed period tied to the time needed to sign the contract and ends early if either party terminates negotiations in writing. The key is to make the period realistic and to state clearly that it is binding.
How long should the due diligence period be, and what about earnest money?
The due diligence period should match the property. A single-tenant building with clean title may need less time than a multi-tenant center with dozens of leases, or land that needs zoning approvals. Buyers should allow enough time to obtain and review a title commitment, an ALTA survey, a Phase I environmental site assessment, and tenant estoppels. Our commercial real estate due diligence checklist covers each item.
Earnest money terms should answer four questions: how much, when it is due, who holds it, and when it goes hard. Some LOIs call for an additional deposit after the due diligence period ends. Buyers should confirm that the deposit remains refundable if the seller defaults or a contingency fails.
What contingencies and closing timeline terms should you negotiate?
Common purchase contingencies include financing, satisfactory title and survey, environmental results, zoning confirmation, and tenant estoppel certificates. If the buyer is using SBA financing for an owner-occupied property, the LOI should reflect the lender’s occupancy requirement: the borrower must occupy at least 51 percent of an existing building, or at least 60 percent for new construction (13 CFR 120.131). If the property is held by a separate real estate entity that leases the whole building to the operating business, the operating company must meet the occupancy test.
The closing timeline should account for lender processing, approvals, and entity setup. Many buyers take title in a new LLC, which should be formed before closing, and the LOI and contract should allow assignment to it. Our LLC formation page explains that step.
How do Virginia and North Carolina differ at the LOI stage?
In North Carolina, parties often move from the LOI to Form 580-T, the Agreement for Purchase and Sale of Improved Real Property published by the North Carolina Bar Association and NC REALTORS (Form 580L-T covers land). Form 580-T uses an “Examination Period,” not the residential “Due Diligence Period,” and has no due diligence fee. Under the form, earnest money is due within 5 days of the contract date, and the buyer may terminate for any reason before the Examination Period ends and recover it. Afterward, the earnest money generally becomes nonrefundable; on a buyer default the seller keeps it as liquidated damages, its sole remedy for that default. If the seller defaults, the buyer may recover the deposit. NC buyers should negotiate the Examination Period and deposit with that structure in mind. For leases, Forms 592-T (single tenant) and 593-T (multiple tenant) are available. See buying or selling commercial real estate in North Carolina.
Virginia has no statewide standard commercial purchase form under the Virginia Code. Contracts are typically drafted or heavily revised by counsel, which gives flexibility but means the LOI does more work in shaping the final document. Virginia buyers should be specific about deposit terms, the study period, and remedies. See buying or selling commercial real estate in Virginia.
Attorney Insight
I tell clients to treat a non-binding LOI as if every word will end up in the contract, because it usually does. If a point matters to you, such as the length of the due diligence period or when the deposit goes hard, raise it in the LOI. Reopening it after the other side thinks the deal is settled costs goodwill and sometimes costs the deal.
Frequently Asked Questions
Do I need a lawyer to review a commercial real estate letter of intent?
It is not required, but a short review can catch unintended binding language, missing contingencies, or unrealistic timelines before they carry into the contract.
Can a seller back out after signing an LOI?
Usually, if the LOI is non-binding as to the sale, though the LOI’s own language controls. A binding exclusivity clause, however, may bar the seller from negotiating with other buyers for the stated period.
Should a lease LOI address a personal guaranty?
Yes. If the landlord expects a guaranty, the LOI should say so, along with any limits such as a cap or a burn-off after a period of timely payments. Otherwise you may face an unlimited guaranty in the landlord’s form.
Is an LOI required before signing a contract?
No. Some parties go straight to a contract, particularly in North Carolina where Form 580-T is available. An LOI is most useful when the deal has several moving parts.
Related Articles in This Guide
- The Legal Guide to Commercial Real Estate in Virginia and North Carolina
- Key Terms in a Commercial Real Estate Purchase Agreement
- Commercial Real Estate Due Diligence Checklist
- Title Insurance and ALTA Surveys in Commercial Real Estate
- Zoning and Land Use Due Diligence for Commercial Property
- Negotiating a Commercial Lease: What Tenants Should Know
- CAM Charges and Triple Net Leases: How Operating Expenses Really Work
- Personal Guaranties in Commercial Leases: Limiting Your Exposure
- Should You Hold Commercial Real Estate in an LLC?
- 1031 Exchanges: Legal Issues, Deadlines, and Common Mistakes
- Buying or Selling Commercial Real Estate in Virginia
- Buying or Selling Commercial Real Estate in North Carolina
Talk With a Commercial Real Estate Attorney Before You Sign the LOI
McCormick Law & Consulting represents buyers, sellers, landlords, tenants, investors, and lenders in commercial real estate matters in Virginia and North Carolina. Because we also form and advise businesses every day (roughly a thousand new entities formed and hundreds of businesses currently represented), we look at a property deal from the operating side as well as the legal side. Every transaction is different, and past results do not predict the outcome of yours.
If you have an LOI in hand or are about to make an offer, we can review the terms and flag the issues worth raising now. Learn more about our real estate transactions practice.
This article provides general information only. It is not legal, tax, or financial advice and does not create an attorney-client relationship. Laws differ by state and change over time. Our attorneys are licensed in Virginia and North Carolina. We assist clients with business transactions involving multiple states. For matters involving the law of a state where we are not licensed, we associate with appropriately licensed counsel or otherwise proceed only as permitted by applicable law.