A Letter of Intent (LOI) is a formal written document used to express a party’s intention to enter into a contract or agreement, outlining the main terms and showing a serious commitment to the deal. They are most commonly used in business transactions.
Because they discuss a potential transaction, a letter of intent is usually (but not always) non-binding. However, certain sections of the LOI, such as confidentiality clauses, exclusivity agreements, or governing law provisions, can be binding.
Besides business transactions, a letter of intent is commonly used for:
- Real Estate
- Property Purchase: To express the intention to purchase a property, setting out the terms of the deal.
- Commercial Leases: Agree upon basic lease terms before formalizing the agreement.
- Employment
- Job Offers: Sent to prospective employees detailing the terms of the employment offer.
- Executive Positions: Negotiating terms for high-level positions.
- Academic Admissions – Express their strong interest in a particular program.
- Collaborative Projects – Outline the terms of a research or development collaboration.
What Is a Letter of Intent?
A letter of intent is a written document that outlines a preliminary agreement between two parties regarding the terms of a potential purchase or another transaction. Some scenarios in which you would see a letter being used:
- Mergers and Acquisitions: Set the groundwork for buying or merging with another company.
- Investments: Agree upon terms with potential investors.
- Joint Ventures and Partnerships: Outline the terms of potential partnerships or joint ventures.
Think of it as a road map for how the negotiation and deal will proceed.
The two parties can settle on specific terms while agreeing to continue negotiating the other terms and details of the transaction before signing a purchase agreement.
While an LOI can help two parties complete a deal down the line, the parties may decide not to proceed with the details in the letter if certain conditions aren’t met (like if there’s a lack of funding from one party).
Is a Letter of Intent Legally Binding?
A letter of intent is typically not legally binding. If you intend for your LOI not to be legally binding, ensure you include a provision to avoid any confusion or assumptions from the other party.
Even without the provision, a court would typically rule that the letter is just an expression of intent.
Why Should You Create a Letter of Intent?
Without this document, you might miss a purchase or sale opportunity. Banks or lenders sometimes require proof of a deal before promising to grant financing. Or, if you are still negotiating specific terms of the agreement, either side may question the other party’s commitment to getting the deal done and walk away.
Here are some of the suffering using this document might help prevent:
| SELLER | PURCHASER |
|---|---|
| Loss of Time | Loss of Time |
| Loss of Money | Loss of Money |
| Mental Anguish | Mental Anguish |
When Should I Use a Letter of Intent?
This agreement is most often used in transactions involving a purchase. Sometimes, two parties will know they want to do a business deal together but aren’t ready to sign an agreement.
For example, they may agree that one party will sell their business for a specific price, but they do not yet agree on who will take on certain business liabilities.
The parties can sign this document to show each other a good faith intention to negotiate a deal. It can also help parties get on the same page as to what they expect from the purchase. A Letter of Intent could be used after a request for a proposal from vendors.
Here’s a list of some possible LOI relationships:
| SELLER | BUYER |
|---|---|
| Owner of a business | Corporation that wants to expand |
| Real estate flipper | Newly married couple |
| Pig farmer | Restaurant with an all-bacon menu |
| Car owner | Newly-licensed driver |
