Most of a US industrial lease is negotiated before a lawyer sees it. The commercial terms get settled in a letter of intent, and by the time the lease document is drafted, arguing them again is expensive and often futile.
That makes the LOI the highest-leverage document in the process — and the one tenants treat most casually.
This guide covers what to settle in the LOI, the clauses that cost real money later, and the specific terms that catch tenants out. Before you negotiate, make sure you have a complete shortlist — the channels for finding warehouse space are covered in Where to Find Warehouse Space for Lease.
The letter of intent
An LOI is a non-binding summary of the main commercial terms both sides are considering. It sets the foundation for the deal and, done well, makes the lease drafting flow smoothly.
Two things to understand about it.
"Non-binding" is not automatic. A court may find an LOI enforceable, which is why the non-binding language has to be explicit rather than assumed.
Some provisions should be binding, deliberately. Confidentiality is almost always intended to be binding on signature. So is exclusivity — a restriction stopping the landlord marketing the space while you negotiate. If you want either, say so explicitly in the LOI; they are usually the only binding parts.
The practical rule: anything you care about should be in the LOI. Terms omitted at LOI stage are negotiated later from a much weaker position, because you have already committed time and the landlord knows it.
The terms that decide the economics
Base rent and escalations. Model the rent in the final year of the term, not the first. Over five or ten years, escalations compound into a large number, and this is the most under-modelled term in industrial leasing. Fixed escalations are predictable; index-linked ones transfer inflation risk to you — cap them if you accept them.
NNN charges. Base rent excludes taxes, insurance and common area maintenance in most US industrial leases, and those are estimated, billed monthly, then reconciled against actual. Negotiate a cap on controllable expenses, audit rights, exclusions for capital expenditure, and a deadline after which the landlord loses the right to bill you. Covered fully in The True Cost of US Warehouse Space.
Free rent. Abatement during fit-out is often easier for a landlord to concede than a lower rate, because it preserves the headline rent for valuation. That makes it productive to push on. Establish whether abatement covers NNN charges as well as base rent — frequently it does not.
Security. Deposit, letter of credit, or guaranty. With no US credit history, expect to post something substantial — see Do You Need a US Entity to Lease a Warehouse?. Negotiate a burn-down: reduction of the deposit or letter of credit after a period of on-time payment.
Define the base building before you discuss allowances
A tenant improvement allowance is meaningless until you know what you are starting from. Industrial space often arrives in shell condition — lacking restrooms, HVAC, or adequate lighting.
So establish what the landlord is delivering before negotiating the allowance, in writing, item by item. Then pin down:
- The amount, per square foot
- What it may be spent on — landlord-favourable definitions exclude anything removable, which can mean racking and equipment, the very things you most need
- Who controls the work, and whether you may use your own contractors
- When it is paid: on completion, in stages, or as a rent credit
- What happens to unspent allowance — frequently it is simply lost
HVAC, and the clause that costs the most
This is the single biggest blind spot in industrial leasing.
In typical industrial leases, repair, maintenance and replacement of HVAC units are solely a tenant expense. A failed unit can cost $5,000 to $20,000 to replace, and it will fail on the landlord's timetable, not yours.
What to negotiate:
- A cap on your annual HVAC expense
- Landlord responsibility for replacement (as opposed to routine maintenance), or a shared split
- A warranty period at the start, with the landlord certifying units are in good working order on delivery
- An inspection before signing, with age and condition of each unit recorded
The same logic applies to the roof, the structure, the parking area and the dock equipment. Establish who repairs and who replaces each, and get it written down rather than left to a general "tenant maintains the premises."
Restoration — the end-of-term liability
Read the surrender clause before signing. You may be required to return the building to its original condition, removing racking, mezzanines and improvements you paid to install. Specialised installations — cranes, power drops, clean rooms — make this expensive, and restoration costs deserve budgeting at LOI stage rather than discovery at exit.
Negotiate for the landlord to identify at lease signing which improvements must be removed, rather than leaving it to their discretion years later.
Flexibility: the clauses you will wish you had
None of these are automatic. If you do not negotiate them, you do not have them.
Renewal options. Fixed-rate or market-rate, with a defined notice period. Without one you have no right to stay.
Expansion rights, and the difference matters:
- A right of first offer (ROFO) gives you a limited window — typically 14 to 30 days — to take adjacent space before it is marketed.
- A right of first refusal (ROFR) is more protective: the landlord must bring you a legitimate third-party offer and let you match it.
ROFR is the stronger right. Know which one you are being offered.
Assignment and sublease rights. Explicitly not inherent. If your business is sold, restructured, or simply outgrows the building, you need the right to assign or sublet. Push for landlord consent "not to be unreasonably withheld," and for permitted transfers to affiliates without consent.
Early termination. Rare and expensive, but worth pricing — particularly if your volume forecast is uncertain. If you cannot get it, that is a signal to consider flexible space instead of a long lease.
Holdover. What happens if you stay past expiry. Holdover rent is often punitive — 150% or 200% of the last rent — so know the number and the notice periods.
Before you sign
- Zoning confirmed in writing for your specific use, with a contingency — see Warehouse Zoning in the US
- Valid certificate of occupancy for your use
- Base building condition documented item by item
- HVAC age and condition recorded, responsibility and caps agreed
- Roof, structure, parking and dock equipment responsibility assigned
- Insurance requirements sent to your broker and confirmed placeable — see Insurance a US Landlord Will Require
- Restoration obligations defined and priced
- Renewal, expansion, assignment and sublease rights in writing
- Escalations modelled to the final year of the term
- NNN capped where possible, with audit rights and a reconciliation deadline
- Security burn-down agreed
Get representation
Industrial brokers typically represent the landlord and are paid from the transaction. A tenant representative works for you and is generally paid from the same commission pool, which usually costs a tenant nothing directly.
If you are new to the market — and especially if you are based outside the US — this is the highest-leverage relationship in the process. Ask any broker directly who they represent and how they are compensated. It is a normal question with an immediate answer.
And have a US real estate lawyer read the lease. The LOI settles the commercial terms; the lease is where the risk allocation lives.
Sources
- Transwestern, Common Pitfalls in Letters of Intent to Lease Industrial Real Estate — base building definition, HVAC as a tenant expense with $5,000–20,000 replacement cost, ROFO versus ROFR windows, restoration, assignment and sublease not being inherent
- Troutman Pepper Locke, Letters of Intent in Commercial Real Estate Leases — enforceability risk, and confidentiality and exclusivity as deliberately binding provisions
- Nolo, Commercial Lease Negotiation: Letter of Intent to Rent — LOI scope and typical terms
- Goodspeed Merrill, The Letter of Intent: Why What You Agree to Before the Lease Gets Drafted Can Make or Break Your Deal
General information, not legal advice. Have a qualified US real estate attorney review any lease before signing.
Common questions
- Is a letter of intent to lease binding?
- A letter of intent is normally a non-binding summary of the main commercial terms, but a court may find one enforceable, so the non-binding language must be explicit rather than assumed. Certain provisions are usually made deliberately binding on signature, most commonly confidentiality and exclusivity, which stops the landlord marketing the space while you negotiate.
- Who pays for HVAC repairs in an industrial lease?
- In typical US industrial leases, repair, maintenance and replacement of HVAC units are solely a tenant expense, and a failed unit can cost $5,000 to $20,000 to replace. Negotiate a cap on annual HVAC expense, landlord responsibility for replacement as opposed to routine maintenance, a warranty period at the start, and an inspection recording the age and condition of each unit before signing.
- What is the difference between a right of first offer and a right of first refusal?
- A right of first offer gives you a limited window, typically 14 to 30 days, to take adjacent space before it is marketed. A right of first refusal is more protective: the landlord must bring you a legitimate third-party offer and let you match it. Neither is automatic, and a right of first refusal is the stronger right.
- Can a warehouse tenant sublease or assign the lease?
- Not automatically. Assignment and sublease rights are not inherent and must be negotiated explicitly. Push for landlord consent not to be unreasonably withheld, and for permitted transfers to affiliates without consent. Without these rights you cannot easily exit if the business is sold, restructured, or outgrows the building.