The Letter of Intent in Commercial Real Estate: What It Binds and What It Doesn't

By Hank FasthoffJuly 5, 2026

Most commercial real estate transactions start with a letter of intent, not a contract. A buyer submits an LOI to a seller outlining the proposed purchase price, earnest money, due diligence period, financing contingency, and closing timeline. A prospective tenant submits an LOI to a landlord outlining proposed rent, lease term, tenant improvement allowance, and renewal options. If the other side agrees to the general terms, the parties move to a definitive purchase and sale agreement or lease. If they don't, both sides walk away without having spent money on legal drafting.

That's how LOIs are supposed to work, as a non-binding framework that tests whether a deal is worth pursuing before anyone commits the time and expense of negotiating a definitive agreement. In practice, LOIs are more complicated than that. Some provisions are binding even when the rest of the document isn't. Some LOIs are drafted so poorly that they become enforceable contracts whether the parties intended it or not. And the terms agreed in an LOI, even when non-binding, are difficult to renegotiate later without jeopardizing the deal.

What's Non-Binding

In a properly drafted LOI, the economic terms are non-binding. Purchase price, rent, earnest money amounts, the length of the due diligence period, financing contingencies, the proposed closing or lease commencement date, and the allocation of closing costs are all subject to the definitive agreement. Neither party is legally obligated to close the transaction based on the LOI alone.

Non-binding means what it says. If the buyer and seller sign an LOI at $5 million, and the buyer's due diligence reveals problems that weren't apparent from the listing, the buyer can walk away without liability. If the landlord and tenant sign an LOI at $25 per square foot and the tenant's space planner determines the layout won't work, the tenant can walk away without liability. No purchase agreement or lease has been signed, and neither party is bound to proceed.

But "non-binding" is a legal conclusion, not a magic word. If your LOI doesn't include a provision stating that the economic terms are non-binding and that no binding obligation arises until execution of a definitive agreement, a Texas court may look at the document's language, the parties' conduct, and whether all material terms are present, and conclude that you've already formed a contract. Texas courts have held that when an LOI contains all material terms and reflects intent to be bound, it can be enforced as a binding contract even if the parties planned to sign a more definitive document later.

What's Binding

A well-drafted LOI splits into two sections. One contains the non-binding economic terms. The other contains provisions that are binding on both parties from the moment the LOI is signed. Three provisions are binding in virtually every commercial LOI.

Exclusivity (the no-shop clause) prevents the seller or landlord from negotiating with other parties during a defined window, typically 30 to 90 days. Exclusivity protects the buyer's or tenant's investment in due diligence, legal fees, and third-party reports by ensuring the other side isn't shopping the property while the LOI party is spending money. Breaching exclusivity is an enforceable claim. A seller who negotiates with a competing buyer during the exclusivity period can be liable for the first buyer's wasted due diligence costs.

Confidentiality prevents either party from disclosing the terms of the LOI, the financial information exchanged during negotiations, or that negotiations are occurring. Confidentiality protections are particularly important for tenants who don't want competitors to know they're relocating, and for sellers who don't want the market to know the property is being sold (which can destabilize tenant relationships and affect the property's perceived value).

Governing law and jurisdiction specify which state's law applies and where disputes will be heard. This provision is binding because it controls how every other provision, binding or non-binding, is interpreted if a dispute arises.

Some LOIs add binding provisions for good-faith negotiation (requiring the parties to negotiate the definitive agreement in good faith), expense reimbursement (requiring the seller to reimburse the buyer's due diligence costs if the seller breaches exclusivity), and access to the property (granting the buyer or tenant access to conduct inspections during the diligence period).

LOIs for Purchases

A commercial purchase LOI should address the purchase price (a specific number, not a range), earnest money (amount, when it's deposited, when it goes "hard" and becomes non-refundable), the due diligence or feasibility period (typically 30 to 60 days for commercial properties), financing contingency (whether the buyer's obligation to close is contingent on obtaining financing, and the deadline for waiving that contingency), the proposed closing date, who pays which closing costs (title insurance, survey, transfer taxes, recording fees), and whether the transaction is structured as an asset purchase or an entity purchase (buying the property versus buying the LLC that holds it).

Earnest money in commercial transactions typically runs one to two percent of the purchase price for the initial "soft" deposit, which is refundable during due diligence. When the due diligence period expires and the buyer "goes hard," the deposit becomes non-refundable, and a second "hard" deposit of three to five percent may be required. Both the amount and the timing of hard money should be specified in the LOI, because they're among the most negotiated terms in the definitive agreement.

LOIs for Leases

A commercial lease LOI should address the premises (suite number, square footage, and whether the measurement is usable or rentable), the lease term and commencement date, base rent and annual escalations (fixed increases or CPI-based), operating expense structure (gross, modified gross, or triple net), tenant improvement allowance (the dollar amount the landlord contributes toward build-out, typically expressed per square foot), free rent (months of abatement at the beginning of the term), renewal options (number of renewals, length, and rental rate for renewal terms), assignment and subletting rights, exclusive use provisions (if the tenant wants to prevent the landlord from leasing to a competitor in the same building or center), and any personal guarantee of the tenant's obligations.

Lease LOIs also address the landlord's delivery condition (shell condition, turnkey, or "as-is"), the construction timeline if the landlord is building out the space, and penalties or rent abatement if the space isn't delivered on time.

The Texas Enforceability Risk

Texas courts have held that an LOI can become an enforceable contract if it contains all material terms, the parties intended to be bound, and the parties began performing under the LOI's terms. In John Wood Group PLC v. ICH, 26 S.W.3d 12 (Tex. App. 2000), the court observed that a party who doesn't wish to be prematurely bound by a letter agreement should include a provision stating that the letter is non-binding, and that such negations of liability have been held to be effective. But the court also noted that absent careful drafting, parties may find themselves bound by a letter agreement that doesn't contain all of the protections for which they would normally negotiate.

In RHS Interests, Inc. v. 2727 Kirby Ltd., 994 S.W.2d 895 (Tex. App. Houston [1st Dist.] 1999), the court evaluated an LOI containing language that the offer was "a summary of a transaction to be more fully described in an Earnest Money Contract the specifics of which will be negotiated in good faith," and found that the LOI wasn't an enforceable contract because the language reflected that the parties didn't yet have a deal.

These cases illustrate the same point from both sides. If your LOI states that it's non-binding and that no obligation arises until a definitive agreement is executed, Texas courts will generally enforce that language. If your LOI doesn't include that language, and it reads like a complete agreement (property identified, price agreed, parties signed, performance begun), a court can treat it as a binding contract whether you intended that result or not.

Real estate transactions in Texas must also satisfy the statute of frauds (Texas Business and Commerce Code § 26.01), which requires contracts for the sale of real property to be in writing and signed by the party to be charged. A signed LOI that contains all material terms of a real property sale can satisfy the statute of frauds, which is another reason to include non-binding language if you don't intend the LOI to be the final agreement.

Common Mistakes

Signing an LOI without non-binding language. If your LOI doesn't include a provision stating that the economic terms are non-binding and that no binding obligation arises until execution of a definitive agreement, you've created an enforcement risk. Every LOI should include this language.

Treating the LOI as a formality. The terms you agree to in the LOI set the baseline for the definitive agreement. Trying to renegotiate the purchase price, the earnest money schedule, or the lease rate after the LOI is signed signals bad faith and can kill the deal. Negotiate the LOI as if the terms will carry forward, because they will.

Omitting the expiration date. An LOI without an expiration date gives the other side unlimited time to shop the property, compare offers, and use your LOI as a bargaining chip to extract better terms from a competing buyer or tenant. Include a 48-to-72-hour expiration that forces a response.

Failing to specify what's binding and what's not. An LOI that mixes binding and non-binding provisions without labeling them invites a dispute about which provisions the parties intended to enforce. Separate the binding provisions into a distinct section and label it.

Skipping legal review on the LOI because "it's just an LOI." The LOI is where you commit (psychologically and sometimes legally) to the deal terms. Having counsel review the LOI before you sign costs a fraction of what it costs to renegotiate or litigate terms you agreed to without advice.

Practical Recommendations

Include non-binding language that's unambiguous. "This LOI is a statement of current intentions only and doesn't create a binding obligation to buy, sell, or lease the property, or to sign a definitive agreement, or to complete any transaction. No binding obligation arises until a definitive agreement is fully executed by both parties." Language to that effect should appear near the top of the document and again in the binding provisions section.

Specify the binding provisions separately. Exclusivity, confidentiality, governing law, and any other provisions you intend to be enforceable should appear in a labeled section (often at the end of the LOI) with a statement that those provisions are binding on both parties from the date of execution.

Negotiate the LOI seriously. Don't sign an LOI at a price or on terms you don't intend to honor in the definitive agreement. The LOI sets the framework, and departing from it without justification erodes trust and can trigger good-faith claims if the LOI includes a binding negotiation provision.

Set an expiration date. A 48-to-72-hour window for purchase LOIs and a one-to-two-week window for lease LOIs are common. After expiration, the LOI terminates and the offering party has no further obligations.

Don't begin performance until the definitive agreement is signed. Conducting inspections, ordering surveys, or making deposits under the LOI's terms can be construed as evidence that the parties intended the LOI to be binding. Wait for the purchase agreement or lease before taking actions that look like performance under a contract.