The Letter of Intent (LOI) in Commercial Real Estate: Why You Sign a “Non-Binding” Document Anyway

Quick Answer

Align verbally on the shape of the deal (price range, size, timing)

Draft the LOI — binding and non-binding provisions named separately

Sign → the exclusivity clock starts; the seller stops shopping the asset

Counsel drafts the APS, converting the commercial terms into real obligations

APS signed → due diligence begins; the LOI’s commercial terms give way

What you are actually buying: a clock, not a promise

Strip away the paperwork and an LOI purchases one thing of real value: a defined window in which the seller is not shopping the asset while you spend money. Because you are about to spend real dollars — environmental consultant, building inspector, appraiser, counsel on title. Without an exclusivity clause, every dollar of that is you conducting free due diligence for whoever outbids you next month.

The second thing it buys is cheaper alignment. A full agreement of purchase and sale is expensive to draft and re-draft; resolving the ambiguities on two pages first is what saves you from a collapse three weeks and many billable hours later.

What it does not buy is a deal. Nobody has to close.

The binding core: four clauses that are live on signature

These are contract, full stop. They survive whether or not you ever close.

Confidentiality. The seller is about to hand you the rent roll, the leases, operating statements, tax bills. This clause governs what you may do with them — and typically bars using them for anything other than evaluating this purchase. It has a stated survival period; read it.

Exclusivity / no-shop. The seller agrees not to negotiate with anyone else for a defined window. This is the clause you are really signing for.

Expenses. Who pays for what if this dies — usually each side bears its own, but not always, and break-fee style provisions do appear.

Governing law and forum. If the binding clauses are ever litigated, under whose law and where. An Ontario asset does not automatically mean an Ontario forum, particularly when the vendor is an out-of-province or offshore entity.

The non-binding layer: what goes in it, and why detail still matters

Per Merovitz Potechin LLP (2025), the commercial layer typically covers the property description, purchase price, critical timeline dates (due diligence, closing), conditions such as financing and title search, allocation of closing costs, and the scope of representations and warranties.

None of it obliges anyone to close. So why negotiate it hard? Because it anchors. Every number you concede here becomes the seller’s baseline in the APS. Try to claw a term back at the definitive-agreement stage and you will hear, with total sincerity, “but we already agreed to that.” You are legally free to walk it back. You are not commercially free.

The other failure mode is the opposite one: an LOI so vague that everything meaningful is left to be negotiated later. Then you have spent negotiating capital and bought nothing but the exclusivity clause.

How a court decides whether your “non-binding” LOI binds you

This is the part most buyers get wrong. Per CARREL+Partners LLP (2024), whether an LOI is binding turns on the language used in the document and the actions of the parties involved — and Ontario courts have consistently held that a non-binding clause will not necessarily guarantee the LOI is non-binding.

The common-law test is objective. It does not ask what you privately meant. It asks what a reasonable person would conclude from your words and conduct in context. In practice three things carry the weight:

Language. Commitment wording — “it is agreed,” “the purchaser shall” — pulls toward binding. Contingency wording — “subject to a definitive agreement” — pulls away.

Conduct after signing. Frequently decisive, and it can outweigh what the paper says. Behave like the deal is done — take possession-style access, announce the sale, start performing — and the disclaimer gets thin.

Essential terms. If price, property, and timing are all settled, a court has something to enforce. If they are still open, the document looks like an unenforceable agreement to agree. Price is essential almost every time.

There are no magic words. A disclaimer is persuasive, not conclusive. That is exactly why this document goes past counsel.

The handoff to the APS

The correct mental model is a division of labour: the LOI sets the frame; the APS creates the obligations. The LOI identifies the key terms that get incorporated into the formal contract later — it is raw material, not a miniature version of the finished thing.

Two practical consequences. First, sequencing — the moment the APS is signed, the LOI’s commercial layer has done its job and the APS governs; make sure the documents do not contradict each other, and that your counsel addresses which binding LOI clauses (confidentiality especially) survive into or alongside the APS.

Second, resist the urge to front-load. Representations, warranties, indemnities, and remedies are APS work. An LOI that tries to do all of that becomes long, slow, and — the real hazard — detailed enough that a court could find every essential term settled.

Five questions to bring to your lawyer before signing

This article explains structure; it is not legal advice, and an LOI is a document to have drafted or at minimum reviewed by counsel. Per CARREL+Partners LLP (2024), the recommendation is to have lawyers review the draft at minimum and ideally draft the LOI itself — they caution that even experienced professionals should seek legal review before signing, because a badly drafted LOI can be, in their words, the final nail in the coffin of your business ambitions. Walk in with these:

1. Which numbered sections are binding, and does the document say so explicitly?
2. When does exclusivity start — on signature, or on the seller’s delivery of the diligence materials? What terminates it early?
3. Does exclusivity bar the seller from signing with others, or from talking to them? Those are very different protections.
4. Is there any wording here that reads as commitment rather than proposal?
5. What conduct after signing could undermine the non-binding disclaimer — what should we avoid doing?

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