What is a Letter of Intent?

letter of intent

Letters of Intent are pre-contractual documents establishing basic terms which the parties intend to incorporate into a definitive agreement; in other words, they are “agreements to agree.”

They are used in many major business transactions, including the purchase or sale of a company, commercial real estate purchases, lease agreements, and several other categories of agreements.

It is important to note that although these are pre-contractual documents, there are elements of a Letter of Intent that may be binding, and courts have imposed liability on a party based on a Letter of Intent.  Also, the language of a Letter of Intent itself is not dispositive of whether it will remain non-binding, as the parties’ conduct can lead a court to interpret as binding an otherwise non-binding document.

Parties usually state which provisions of the Letter of Intent will be binding.  These provisions should be valid, binding, legal, and enforceable.  The other provisions, non-binding ones, are optional terms that if agreed upon, will create a contract. Careful drafting is required to properly distinguish the binding provisions from the non-binding provisions, as prior to signing a definitive agreement, a party should be able to terminate a transaction for any reason.

Not every transaction has a Letter of Intent; instead, the parties sometimes proceed straight to negotiating a definitive agreement or agreements.  A primary reason parties enter into a Letter of Intent is to document each party’s expectations with respect to the essential terms of the proposed transaction early on.  Additional reasons include demonstrating the parties’ commitment to the transaction and setting a timeframe for the completion and execution of the definitive agreement or agreements to the transaction.  Also, documenting a transaction with a Letter of Intent can be seen as a way to keep a transaction moving forward, while there are times when a party may want to assess problems in a transaction before going too far, as it takes much less time to draft a Letter of Intent than a formal set of documents.  Often, the Letter of Intent will be the written authorization for a party to begin their due diligence with respect to a transaction.  Also, contingencies to consummation of the transaction should be specified. A Letter of Intent will often contain deadlines for satisfying such contingencies.

Letters of Intent should be viewed as any other legal document – they should be carefully drafted and should be fully understood before being signed.  Make sure that your Letter of Intent clearly states that it is non-binding and that the transaction is contingent upon the parties entering into a final agreement. And remember that if the transaction is significant enough that it is documented in two steps (beginning with a Letter of Intent and ending with a definitive agreement), seek out the assistance of an attorney early on.

— Written by Joseph K. Koury, Esq.

DISCLAIMER: The contents of this blog are not legal advice, and are not to be used for that purpose.  If you are faced with a legal matter, you should contact a lawyer immediately in order to ensure that you are protected.