What is a letter of intent?

A letter of intent (LOI) is a preliminary document used to outline the key terms of a prospective agreement between two or more parties. While not legally binding in most cases, it serves as a roadmap for negotiations and signals the parties' mutual interest in formalising a more complex deals that is expected to take longer to close. They provide parties with some clarity and peace of mind whilst ironing out the crinkles of their deal.

You can think of an LOI as the foundation for building a formal contract — it highlights the "what" and "why" of the proposed agreement while leaving the "how" for later.

They are often accompanied by an NDA and non-solicitation provisions, all in all laying the groundwork for the ensuing negotiations; protecting the interests of both parties and broadly outlining their intentions. In cases where confidentiality is not an issue, the signing of the LOI can be the moment at which external stakeholders can be informed about the seriousness of the project, like a publicly-traded company informing its investors about her plans.

How to Write a Letter of Intent?

We’ve researched the most commonly asked questions that come up in writing an LOI, and answered them below. On the Docfield platform, you can access several free LOI templates. We recommend using a template as a starting point. The below checklist will help you re-read your checklist to confirm you’ve covered relevant parts.

1. How Do You Begin the Letter?
   • Who Are the Parties Involved? Start by clearly stating the full names of all the parties entering into the agreement. This helps prevent any confusion about who is participating. Use full names, home addresses, or even passport numbers if contracting parties are individuals.
   • What Is the Purpose of the Letter? Briefly explain why you're writing the LOI. Are you proposing a partnership, making an offer to purchase, or starting a new project?
   • Tip: Be specific and straightforward to ensure everyone is on the same page from the get-go. Quantify objectives where possible, but careful not to prematurely commit to anything you still want to negotiate. Providing a range can help.
2. What Key Terms Should You Include?
   • What Are the Main Points of Agreement? Summarise the essential details you've discussed so far. This might include roles and responsibilities, pricing, timelines, and specific goals or deliverables.
   • Are There Any Special Conditions? Do you need to include confidentiality agreements, exclusivity clauses, or plans for due diligence? Make sure to mention any provisions that are important to your agreement. Think about the ways in which the agreement provides coverage to both parties.
   • Advice: Avoid jargon or overly technical language. Keep it clear and simple to prevent misunderstandings.
3. How Do You Clearly Express Your Intentions?
   • Is the Letter Legally Binding or Non-Binding? Clearly state whether the LOI is meant to be a non-binding agreement or if certain sections (like confidentiality) are legally binding. This can prevent legal issues down the road.
   • Are Both Parties Committed to Proceed? Express that both sides intend to move forward and negotiate in good faith toward a formal agreement.
   • Common Mistake: Forgetting to specify the binding nature of the LOI can lead to confusion. Make sure to address this explicitly.
4. What Are the Next Steps?
   • What Actions Need to Be Taken? Outline the steps required to finalise the agreement. This could include scheduling meetings, drafting contracts, or obtaining necessary approvals. If a rough timeline or deadline is known, you can include it here.
   • Are There Any Conditions or Contingencies? Mention any conditions that need to be met before proceeding, such as passing due diligence checks or securing financing.
   • Best Practice: Set realistic timelines to keep everyone aligned and the process moving smoothly.
5. How Do You Conclude the Letter?
   • Do You Have Any Closing Remarks? End on a positive note by expressing enthusiasm about the potential partnership or agreement.
   • Where Should Parties Sign? Include spaces for all parties to sign and date the letter. This acknowledges that everyone understands and agrees to the terms outlined.
   • Advice: Ensure that the individuals signing have the authority to represent their respective parties.

Is a Letter of Intent Legally Binding?

The legal binding nature of an LOI depends on its wording and the context in which it is used. Typically, LOIs are not legally binding, as their purpose is to establish intent rather than enforce obligations. However, certain provisions, like confidentiality, exclusivity, or governing law, can be binding if explicitly stated.

It's important to note that an LOI is not the same as a memorandum of understanding (MOU). While both documents outline preliminary agreements, an MOU may carry more legal weight and is sometimes considered more formal than an LOI. The enforceability of an MOU can vary depending on the jurisdiction and how it's drafted.

Letter of Intent Examples

There are many real life examples of letters of intent. Interestingly, the four categories of LOIs that are shared most frequently the news are as follows:

1. US high school athletes signing an LOI to prospective universities (colleges).
2. Mergers and Acquisition (M&A) deals involving publicly traded companies.
3. Industrial partnerships or large-scale infrastructure projects.
4. Government-backed initiatives, treaties, and programmes.

This illustrates the wide application of this type of agreement.

Conclusion

A well-crafted Letter of Intent serves as a solid foundation for any forthcoming agreement, helping to ensure that all parties share a clear understanding of the proposed terms. By thoughtfully addressing each key component—from introducing the involved parties to outlining the main terms and clarifying the letter's legal standing—you set the stage for successful negotiations. Remember to be explicit about any binding provisions and to communicate openly to prevent misunderstandings. Taking the time to draft a comprehensive LOI can save you from potential pitfalls down the road and pave the way for a fruitful partnership.