Is a Letter of Intent Legally Binding?

Many commercial real estate tenants, in Canada, treat an Offer to Lease or Letter of Intent (LOI) as a preliminary document. It outlines the business terms, everyone agrees in principle, and the lawyers sort out the details later.

Sometimes that’s exactly how the process works. Other times, that assumption can become an expensive mistake.

Depending on how it is drafted, an Offer to Lease or Letter of Intent can create legally binding obligations before a formal lease is ever signed. By the time legal counsel is brought into the process, many of the key business terms may already be locked in, leaving little room to negotiate.

The good news is that this risk is largely avoidable. Understanding what to look for before you sign can help protect your business and put you in a much stronger position throughout the lease negotiation.

When can a Letter of Intent become legally binding?

There is no universal rule. Whether an Offer to Lease or Letter of Intent is legally binding depends on the wording of the document and the intentions of the parties.

Some LOIs clearly state they are non-binding and that only a fully executed lease creates legal obligations. Others contain language that makes the agreement binding immediately or provides that the Offer to Lease will serve as the lease if a formal agreement is never completed.

That is why it is important to read beyond the business terms. What appears to be a simple proposal may carry legal obligations you were not expecting.

Three things tenants should review before signing

1. Does the Offer to Lease become the lease if a formal lease is never signed?

Some Offers to Lease include language stating that if the parties never complete a formal lease agreement, the Offer itself will function as the lease.

If that is not your intention, the document should clearly state that only a fully executed lease creates a binding agreement between the parties. Language making the arrangement “subject to” a formal lease being executed, or “subject to” board or other approvals, is one of the primary tools courts use to determine that the parties did not intend to be immediately bound.

This small provision can have significant consequences if negotiations stall or circumstances change.

2. Is the agreement actually binding?

Do not assume an Offer to Lease or Letter of Intent is non-binding simply because it is not called a lease.

Many documents include legal language explaining whether the agreement creates binding obligations. Some even state that the tenant has received legal advice before signing.

Those acknowledgements should only be accepted if legal counsel has actually reviewed the document and explained the potential risks.

Knowing whether you are signing a binding or non-binding agreement is one of the most important parts of the negotiation process.

It is also worth understanding that this is often not an all-or-nothing question. Many well-drafted Offers to Lease and Letters of Intent are only partially binding: the commercial terms are expressly stated to be non-binding, while certain provisions are intended to bind the parties immediately. Common examples include confidentiality obligations, exclusivity or “no-shop” commitments, the treatment of any deposit, responsibility for costs, and an obligation to negotiate the formal lease. Knowing which parts of the document are binding, and which are not, is just as important as knowing whether the document as a whole is binding.

3. Does it include the essential terms of a lease?

Even where the commercial terms are expressly non-binding, an Offer to Lease that requires the parties to negotiate a formal lease can still carry obligations. Canadian law recognizes a duty of honest performance in contractual dealings, and a commitment to negotiate in good faith can expose a party that walks away improperly, or negotiates dishonestly, to liability. A “non-binding” label on the business terms does not necessarily mean there are no consequences to how the negotiation is conducted.

Canadian courts have held that an agreement containing the essential terms of a lease may be treated as a lease, even if the document is titled an Offer to Lease or Letter of Intent.

It is important to keep in mind that commercial leasing law is largely provincial, so the specific principles and outcomes can vary from one province to another. Quebec in particular is governed by the Civil Code and approaches these issues differently than the common law provinces. Legal advice specific to the province where the premises are located is always recommended.

Those essential terms generally include:

• The premises
• The rent
• The lease term

If those elements are present, and the document does not clearly state otherwise, you may already have a legally enforceable agreement.

The reverse is also true. If essential terms are left “to be agreed” at a later date, a court may find that no enforceable agreement exists at all because the terms are too uncertain. It is also worth noting that, where the essential terms are present, a court will often enforce the document as an agreement to enter into a lease, rather than treating the document itself as the lease. In either case, the practical result can be significant: a party may be held to the deal, or may lose the deal, based on how the document was drafted.

Why involving legal counsel early matters

Many tenants wait until the formal lease has been drafted before asking legal counsel to review the documents.

The challenge is that by then, many of the important business terms have already been negotiated and agreed upon. Changing them can become much more difficult.

Bringing legal counsel into the process earlier helps ensure the Offer to Lease accurately reflects the deal you believe you are making. It also provides clarity on whether the document is intended to be binding and identifies legal risks before they become contractual obligations.

A little attention at the beginning of the process can prevent much bigger issues later.

What tenants should remember

An Offer to Lease or Letter of Intent is not always just a stepping stone to the lease. In some situations, it may become the lease or create legal obligations before the formal document is ever signed.

Understanding what the document says, confirming whether it is intended to be binding, and involving legal counsel early can help protect your business and avoid costly surprises during lease negotiations.

If you’re preparing to negotiate a commercial lease, Landmark Advisory Services can help you review the business terms, identify potential risks, and coordinate with our legal counsel so you can move into lease negotiations with confidence.

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