What Is a Letter of Intent?
A letter of intent (LOI), or a letter of interest, is a document that outlines the main terms of a potential agreement. It shows a serious interest in moving forward and helps everyone stay aligned before creating a final contract. You might use a letter of intent for purchase agreements, business contracts, joint venture agreements, or licensing agreements.
While an LOI is not legally binding, it sets clear expectations and often leads to more formal agreements. It can also involve some back-and-forth to fine-tune the terms. Before signing a letter of intent, it’s a good idea to do your due diligence. That way, both sides can confirm key details and decide if they’re ready to commit.
Using a letter of intent template can help you save time, stay organized, and ensure your document includes all the key elements from the start.
Is a Letter of Intent Legally Binding?
A letter of intent is typically not legally binding, as it outlines a potential transaction and serves as a moral commitment for further negotiations. However, if it includes legally binding sections, those fundamental terms become enforceable and hold the parties involved accountable.
An LOI can have the following legally binding elements:
- Confidentiality clause: Requires the parties to keep shared information private during negotiations.
- Exclusivity clause: Stops the parties from discussing deals with other buyers or sellers for a set time.
- Nonsolicitation clause: Prevents either party from using the deal to take clients, customers, or employees from the other party.
- Governing law clause: Specifies which jurisdiction will interpret the contract and how disputes should be handled.
- Indemnification clause: States whether one party must pay the other for any losses caused by breaches during negotiations.
How to Write a Letter of Intent
Writing a letter of intent involves expressing your interest and outlining the key terms of your proposal. While the following steps focus on writing an LOI for a purchase, you can easily adapt them for other situations.
1. Add the Initial Information
Include the date of the letter for context on deadlines. Add your contact information—name, address, phone number, and email—in the header for easy communication. Clearly identify the Buyer and Seller by name, as they will be referred to as “Buyer” and “Seller” throughout the letter.
2. State the Possible Purchase & Price
State the possible transaction and describe the property the buyer may purchase. Include the purchase price and indicate when payment is due—upon signing the letter, a pending purchase agreement, or the buyer’s acceptance of the property. If you need to complete due diligence before determining a price, you can indicate that it is not yet available.
3. Record Any Conditions
You may only want to proceed with the purchase if certain conditions are met. Use your letter to specify that the transaction hinges on the buyer’s ability to secure financing, the buyer’s inspection of the property, or another condition.
4. Provide Exclusivity & Confidentiality Statements
Clarify that the seller will not negotiate with other potential buyers regarding the property sale. This exclusivity clause can last for a set number of days or remain valid for the duration of the letter. Additionally, include a confidentiality clause to ensure that the parties agree to keep the letter and its contents secret.
5. State the Termination Guidelines
State when or how the agreement will terminate. You can specify that it will end upon the earliest of one of the following events:
- signing of a purchase agreement by the parties involved
- mutual written agreement by the parties
- arrival of a predetermined date
6. Add a Non-Binding Effect
Add an explicit statement that this letter is simply one to show interest. Clarify that neither party has any obligation when they sign it. State that they must only adhere to the terms of exclusivity, confidentiality, termination and governing law.
7. Include Other Provisions
Include any other provisions to make your letter stronger and more specific. For example, you can provide a general timeline of how you’d like to see the purchase go. You may state that you’ll complete due diligence within 45 days or obtain financing within that same period. These milestones and deadlines can help facilitate future negotiations.
You can also write the state to indicate which government will oversee the letter’s contents. Naming a governing law can help if disputes arise when you negotiate the terms further, as you and the other party will know which laws will interpret the LOI’s terms.
8. Sign & Proceed
Obtain the parties’ signatures to formalize their intent. If there are multiple buyers or sellers involved, ensure to collect all signatures.
Once you sign the original letter of intent, you may start negotiations for a more formal agreement. For example, suppose you signed a subcontractor letter of intent. If you and the contractor negotiate terms you agree to, you may need to sign a subcontractor agreement to make the work relationship official.
