Last updated January 16, 2024
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What is a Letter of Intent (LOI)?
A Letter of Intent (LOI) is a document that allows you to form an understanding with another party when intending to enter a legally binding agreement. If you are negotiating or entering into a sale, partnership, or lease, a Letter of Intent can set the terms for the future deal.
By signing a Letter of Intent, you show that you are acting in good faith, meaning you are sincere and honest about your intention to complete the transaction.
In addition to declaring honest intentions, a Letter of Intent creates the framework for the negotiations by outlining fundamental terms for the future agreement.
Generally, a Letter of Intent is signed between two parties contemplating a future binding contract. These parties can be individuals, contractors, businesses, or organisations.
A Letter of Intent is also known as a:
- Letter of intention
- Expression of interest
- Statement of intention
- Negotiation agreement
- Term sheet
- Notice of intent
- Heads of terms
- Memorandum of understanding
What is the purpose of a Letter of Intent?
A Letter of Intent aims to help you and the other party negotiate toward a final contract. It outlines fundamental terms and conditions you agree on in principle before you move further into the arrangement.
In certain types of transactions, the only way to reach a final agreement is if one of the parties reveals confidential information to the other. For instance, if you are selling a business, you might have to offer the buyer private information about the company, which allows the buyer to evaluate the information before they agree to negotiations. This evaluation is called due diligence. The Letter of Intent will set a timeframe for completing the due diligence if confidential information is involved.
By prefacing an agreement, the Letter of Intent:
- Ensures a flow of communication between you and the opposite party
- Expresses your intentions to formalise the deal in a binding document
- Helps finalise the details before you sign a legally binding agreement
- Reassures each party that you are both acting in good faith and with sincere intentions
- Provides structure for further negotiations
- Facilitates any exercise of due diligence for the purchaser
When should I use a Letter of Intent?
You can use a Letter of Intent when you are looking to negotiate an agreement with another party before drawing up a binding contract. Letters of Intent can be especially beneficial in situations that involve complex negotiations and analysis of confidential business information. If one of the parties has to reveal confidential information that will allow the other party to make an informed decision, use a Confidentiality Agreement in addition to the Letter of Intent.
Some common situations in which you can use Letters of Intent include:
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Buying or selling
You can use a Letter of Intent to purchase or sell a variety of things. Whether you are buying or selling, a Letter of Intent can help you negotiate the terms of the sale and reassure the other party that you are serious about the deal. Letters of Intent can be beneficial while buying or selling any of the following:
- A business: A Letter of Intent to purchase or sell a business can help you begin the sale negotiations. The purpose of the letter is to establish the main terms of the proposed transaction before executing a Purchase of Business Agreement.
- Shares in a business: A Letter of Intent to purchase or sell shares can help you outline and negotiate the terms of a proposed transaction before you create a Share Purchase Agreement.
- Real estate: A Letter of Intent to purchase or sell real estate can help outline the sale terms. The purpose is for the letter to act as a draft agreement so you can easily create a Real Estate Purchase Agreement from it later.
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Forming a partnership
You can use a Letter of Intent to express your intentions of forming a partnership with another party. Partnerships can be formed between two or more individuals or corporations.
The Letter of Intent will outline the details of your collaboration. It will also show your commitment to moving forward with negotiations before you finalise the arrangement with a Partnership Agreement. Partnership negotiations often involve an exchange of confidential information, as each party will need to know what the others are bringing to the table.
A Letter of Intent can also be used in negotiations to admit a new partner to an existing partnership.
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Negotiating a lease
Whether you are a landlord or a tenant, a Letter of Intent can help you negotiate and confirm details before signing a lease. For example, you can outline fundamental information about rent payments and repair responsibilities. Setting these terms before drafting the lease can reduce miscommunications and speed up the negotiation process.
Business owners often use Letters of Intent to show their interest in renting commercial real estate. By prefacing the negotiations with a Letter of Intent, a business owner can demonstrate to a landlord that they are serious about becoming a tenant. While mainly used for Commercial Lease Agreements, you can also use Letters of Intent for residential ones.
How do I write a Letter of Intent?
The contents of a Letter of Intent vary depending on the type of arrangements you are looking to enter. Generally, your Letter of Intent should at least include the following information:
- Party information: The names and addresses of all parties involved.
- Arrangement details: The fundamental details for the arrangement, including any terms and pricing details.
- When buying or selling, include an item description and the purchase price.
- If entering a partnership, outline the purpose of the business.
- For a lease negotiation, detail the type of property, rent payments, and repair responsibilities.
- Due diligence: Include the location details and timeframe for the evaluation of confidential information, if there will be one.
- Closing date: The closing date or deadline for signing a binding agreement.
Because rules and regulations vary between regions, some Letters of Intent might change depending on jurisdiction.
Is a Letter of Intent legally binding?
A Letter of Intent is not usually a legally binding document. LawDepot’s Letter of Intent template includes a non-binding provision to ensure parties are not bound by its terms. However, this does not mean that a Letter of Intent is unimportant. You should consider a Letter of Intent a moral obligation to proceed with the contemplated transaction and only sign it with genuine intentions.
To ensure that the Letter of Intent is not binding, it should not include any terms that create legally binding obligations. If the Letter of Intent has a clause stating that it is binding and that the parties are bound to its terms, a court could rule that it is enforceable.
Often, negotiations that require Letters of Intent also require binding obligations of confidentiality. In these cases, parties can begin negotiations by signing a binding Confidentiality Agreement, followed by a Letter of Intent.
