LEGAL DICTIONARY

Letter of Intent

A letter of intent (LOI) is a document that outlines the terms and stipulations of an agreement. These are usually a preliminary step in the process of striking a deal between two parties.

They have some similarities with contracts, although they are not legally binding in the same way. LOIs do, however, still have an important role to play in the formation of a commercial or legal agreement.

This article reviews the key uses and purposes that individuals can use a Letter of Intent to achieve. It also details how to write your own copy of this important legal document.

What Is The Purpose of LOI(s)?

A letter of intent is designed to outline the basic formation of an agreement. It is sent as a sign of a party’s intention to form a binding contract and sets out the terms that could apply in this case.

The key purposes of an LOI include the following:

  • Parties can lay-out their intended terms before expending resources on negotiations and formalizing the agreement
  • Negotiators declare their intent and interest in signing an agreement
  • It provides a record of the pre-agreement should talks collapse or fail
  • It verifies any fees made as part of an agreement

This kind of letter has many similarities with a head of terms. Whilst they are formatted in quite different ways they have much the same effect in creating a formal declaration of an interest in forming a deal.

When to Use a Letter of Intent

People usually use a letter of intent as a signal of determination to pursue negotiations and seal a deal. This can either be when negotiations are formally happening or as an initial step prior to the start of discussions between the two parties.

If one party wants to try and move negotiations forward decisively or to make a firm statement of intent to get discussions started, an LOI can help to do that. A letter of intent can be used for a number of different functions. They might be written:

  • For business deals
  • For a job
  • For a scholarship
  • For grad school
  • To purchase real estate

How to Write a Letter of Intent

Normally a letter of intent will be drafted by a corporate attorney. Nevertheless, it is possible to create your own document from scratch using an online template.

When writing a letter of intent it is essential to write the terms clearly and in enough detail to avoid ambiguity. It should explicitly state elements such as the exchange being made and the type of agreement that is to be reached.

A letter of intent must contain the following elements:

  • The main details of the agreement on offer
  • A target date for the agreement to be set
  • The obligations expected to be fulfilled on both sides of the agreement
  • The details of both parties
  • Preconditions of signing the deal

When writing the terms of the offer in the LOI, it is important to state that they are “subject to contract”. This is because the letter of intent itself is usually the first step towards the chief terms that are fully decided and finalized.

After all, LOIs are detailed pre-contract documents used when negotiations are just starting and are not legally binding. If a party is unhappy with the terms offered they can usually walk away from the table without any negative consequences or obligations having to be met.

However, the terms of a letter of intent might be upheld by a court in some cases. This is usually if they breach:

  • Confidentiality Agreement (CA) agreements
  • Non-solicitation terms for customers or employees
  • Exclusivity provisions written into the LOI

What Happens After an LOI Has Been Sent?

Once a letter of agreement has been sent from one party to another, the second party can review the proposal to decide whether to move forward in negotiations. They might wish to make changes to the terms offered.

Additionally, key members of the negotiating parties must be consulted to see if they consent to the deal being proposed. This might include key stakeholders, shareholders, and legal advisors to ensure that everyone in charge is in agreement on the next steps.

It is, of course, possible that the terms may need to be re-negotiated and may change during the discussions. However, the LOI marks the jumping-off point for serious agreements.