Last updated June 15, 2022
What is a Letter of Intent (LOI)?
A Letter of Intent (LOI) is a document that parties use to establish an understanding that they both intend to enter into a legally binding agreement. Parties negotiating and entering a sale, contract, partnership, or lease may find a Letter of Intent template beneficial.
By signing a Letter of Intent, parties show that they are acting in good faith, meaning they are sincere and honest about their intention to do business with one another.
Besides demonstrating honest intentions, a Letter of Intent should also outline some fundamental terms of the future agreement. When completed properly, a Letter of Intent can act as the foundation for the eventual deal.
Generally, a Letter of Intent is signed between two parties. Parties may be individuals, contractors, businesses, or organizations.
A Letter of Intent is also known as a:
- Letter of intention
- Intent to purchase agreement
- Intent to sell form
- Intent to sell letter
- Memorandum of Understanding
What is the purpose of a Letter of Intent?
The purpose of a Letter of Intent is to help parties negotiate toward a final binding contract. It outlines the fundamental terms and conditions that the parties agree on in principle. More specifically, a Letter of Intent:
- Expresses each party’s intention to formalize the arrangement in a binding document
- Helps finalize the details before signing a legally binding agreement
- Reassures each party that the other’s intentions are sincere and in good faith
- Provides structure for further negotiation
- Helps parties exercise due diligence
- Facilitates further discussion
When to use a Letter of Intent
You can use a Letter of Intent under most circumstances in which parties agree to move forward and negotiate in good faith before finalizing their arrangement with a legally binding contract. Often, the situations where Letters of Intent are needed involve complex negotiations and analysis of confidential business information.
Some common situations in which you can use Letters of Intent are as follows:
1. 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 the following:
- Real estate: A Letter of Intent to purchase or sell real estate can help you outline the terms of the sale. Its purpose is to act as a draft agreement, so you can easily make a finalized Real Estate Purchase Agreement later.
- A business: A Letter of Intent to purchase or sell a business can help you negotiate the terms of the sale. Its purpose is to establish the main terms of a 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 main terms of a proposed transaction before creating a Share Purchase Agreement.
- Goods: A Letter of Intent to purchase or sell an item, such as a vehicle, can help you outline and negotiate the main terms of a proposed transaction before creating a final Bill of Sale or Sales Agreement.
2. Contract work
Clients and contractors can use Letters of Intent to establish a preliminary commitment that they will do business with one another. A Letter of Intent can also help clients and contractors negotiate service terms, such as compensation details and timelines, before signing a finalized Independent Contractor Agreement or Service Agreement.
Building contractors, tradespeople, consultants, and freelancers are some of the professionals who may benefit from using Letters of Intent when securing their next job.
You and another party can use a Letter of Intent to indicate your intentions to form a partnership. Partnerships can be formed between two or more individuals or corporations.
The Letter of Intent outlines essential details about the collaboration and shows you are committed to moving forward with negotiations before finalizing the arrangement with a Partnership Agreement. A Letter of Intent can also be used in negotiations for admitting a new partner to an existing partnership.
4. Negotiating a lease
By creating a Letter of Intent, a landlord and tenant can confirm and negotiate fundamental lease terms before signing a lease. It can contain information such as rent payments and repair responsibilities. Outlining these important terms before signing a lease can reduce miscommunications and speed up negotiations.
Whether you are a landlord or tenant, a Letter of Intent can help you negotiate lease terms. Also, it can reassure the other party that you are committed to signing a lease agreement with them.
Business owners often use Letters of Intent before renting commercial real estate. When a business owner signs a Letter of Intent to lease, it can prove to the landlord that they are serious about becoming a tenant. However, Letters of Intent can be used for residential leases too.
Is a Letter of Intent legally binding?
A Letter of Intent is not usually a legally binding document. Our Letter of Intent template includes a non-binding provision to ensure parties are not bound to its terms. However, just because Letters of Intent are non-binding documents does not mean they are unimportant documents. You still need to take them seriously and only sign them with genuine intention.
To ensure a Letter of Intent is not binding, it cannot include any terms that create legally binding obligations. If the Letter of Intent has a clause stating that it is binding and the parties are bound to its terms, a court could rule that it is enforceable. Often, negotiations which require Letters of Intent also require obligations of confidentiality. In these cases, parties can use Confidentiality Agreements.
What to include in a Letter of Intent document
In general, a Letter of Intent document should include the following information:
- The names and addresses of all parties involved
- The fundamental details of the arrangement
- The closing date or deadline for signing a binding agreement
In Letters of Intent, the fundamental details vary greatly depending on the type of arrangement. For example, if you use a Letter of Intent to buy or sell real estate, it should include the property's purchase price and deposit information. If you use a Letter of Intent to negotiate the terms of contract work, it should have a description of services.
How long should a Letter of Intent be?
The ideal length of a Letter of Intent depends on its intended purpose. Typically, a Letter of Intent should be about a page long and no more than two pages.
A Letter of Intent does not need to be lengthy because it should only summarize the initial terms of an agreement. If both parties decide to move forward with the deal, they can include more comprehensive terms and conditions in their final contract.
