A letter of intent (LOI or LoI, or Letter of Intent) is a document outlining the understanding between two or more parties which they intend to formalize in a legally binding agreement. The concept is similar to a heads of agreement, term sheet or memorandum of understanding. Merger and acquisition agreements, joint venture agreements, real property lease agreements and several other categories of agreements often make use of a letter of intent. The capitalized form ''Letter of Intent'' may be used in legal writing, but only when referring to a specific document under discussion. LOIs resemble short, written

contract A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tr ...

s, often in tabular form. They are not binding on the parties in their entirety. Many LOIs, however, contain provisions that are binding, such as those governing

non-disclosure A non-disclosure agreement (NDA) is a legal contract or part of a contract between at least two parties that outlines confidential material, knowledge, or information that the parties wish to share with one another for certain purposes, but wish ...

, governing law, exclusivity or a

covenant Covenant may refer to: Religion * Covenant (religion), a formal alliance or agreement made by God with a religious community or with humanity in general ** Covenant (biblical), in the Hebrew Bible ** Covenant in Mormonism, a sacred agreement b ...

to negotiate in

good faith In human interactions, good faith ( la, bona fides) is a sincere intention to be fair, open, and honest, regardless of the outcome of the interaction. Some Latin phrases have lost their literal meaning over centuries, but that is not the case ...

. A LOI may sometimes be interpreted by a court of law as binding the parties to it if it too-closely resembles a formal contract and does not contain a clear disclaimer. A letter of intent may be presented by one party to another party and subsequently negotiated before execution (or signature). If carefully negotiated, a LOI may serve to protect both parties to a transaction. For example, a seller of a business may incorporate what is known as a non-solicitation provision, which would restrict the buyer's ability to hire an employee of the seller's business should the two parties not be able to close the transaction. On the other hand, a LOI may protect the buyer of a business by expressly conditioning its obligation to complete the transaction if it is unable to secure financing for the transaction.

Purposes of a LOI

Common purposes of a LOI are: * To allow parties to sketch out fundamental terms quickly before expending substantial resources on negotiating definitive agreements, finalizing due diligence, pursuing third-party approvals and other matters * To declare officially that the parties are currently negotiating, as in a

merger Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspec ...

joint venture A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance. Companies typically pursue joint ventures for one of four reasons: to acces ...

proposal * To provide safeguards in case a deal collapses during negotiation * To verify certain issues regarding payments made for someone else (''e.g.''

credit card A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's accrued debt (i.e., promise to the card issuer to pay them for the amounts plus the ...

payments) Potential downsides to using a LOI may include: * The parties may engage in protracted negotiations on only a subset of a deal’s terms * Management time and focus may be diverted * Alternative opportunities may be missed and markets may move against the parties during negotiations * Parties may reduce their lack of a workable deal framework into a LOI, with a hope of making progress later * Public disclosure obligations may be inadvertently triggered * The risk of leaks, exacerbated by the desire of some to tout the LOI to the world, or shop it to other parties In the UK

construction industry Construction is a general term meaning the art and science to form objects, systems, or organizations,"Construction" def. 1.a. 1.b. and 1.c. ''Oxford English Dictionary'' Second Edition on CD-ROM (v. 4.0) Oxford University Press 2009 and co ...

, it has been noted that "a significant element" within the industry appears to be "content to have their commercial and legal relationships defined on the basis of a letter of intent rather than by clear and definite contracts", as a consequence of which problems "often arise" in relation to liability.Elder, N. (2006)
Letters of Intent and Quantum Meruit – Easy Street or Skid Row?
''Brant Associates'', published July 2006, archived 9 October 2007, accessed 11 August 2021

Specific examples

academia An academy (Attic Greek: Ἀκαδήμεια; Koine Greek Ἀκαδημία) is an institution of secondary education, secondary or tertiary education, tertiary higher education, higher learning (and generally also research or honorary membershi ...

, a letter of intent is part of the application process, in which it is also known as a statement of purpose or

application essay An admissions or application essay, sometimes also called a personal statement or a statement of purpose, is an essay or other written statement written by an applicant, often a prospective student applying to some college, university, or graduate ...

. In education in the

United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

, letters of intent are also frequently reached between high school senior athletes and colleges/universities, for the reservation of

athletic scholarship An athletic scholarship is a form of scholarship to attend a college or university or a private high school awarded to an individual based predominantly on his or her ability to play in a sport. Athletic scholarships are common in the United ...

s for the athletes upon graduation from high school. School administrators in

secondary education Secondary education or post-primary education covers two phases on the International Standard Classification of Education scale. Level 2 or lower secondary education (less commonly junior secondary education) is considered the second and final ph ...

often require a letter of intent before approving the formation of a

student club A student society, student association, university society, student club, university club, or student organization is a society or an organization, operated by students at a university or a college institution, whose membership typically consists ...

. In

real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more genera ...

, in cases where the

real property In English common law, real property, real estate, immovable property or, solely in the US and Canada, realty, is land which is the property of some person and all structures (also called improvements or fixtures) integrated with or aff ...

in question is not listed on a multiple listing service, there may not be an easy way to notify the owner of the property and other interested parties of intent to purchase. Often it is necessary to officially begin the process of a purchase, and allow all peripheral interested parties to begin any other processes, with a letter of intent. For example, a multimillion-dollar loan for a commercial property may require a letter of intent before a financial institution will allow personnel to spend time working on said loan necessary for the completion of the sale. The same may be followed at the time of purchase by any company. A tenant and landlord may sign a letter of intent prior to signing a lease agreement to stipulate rental rates and all regulations of the future tenancy. In the

solicitation Solicitation is the act of offering, or attempting to purchase, goods and/or services. Legal status may be specific to the time or place where it occurs. The crime of "solicitation to commit a crime" occurs when a person encourages, "solicits, r ...

of government grants, a letter of intent is highly encouraged but it is not required or binding, and does not enter into the review of a subsequent application. The information that it contains allows agency staff to estimate the potential workload and plan the review.Typical example:

References

{{DEFAULTSORT:Letter Of Intent Legal documents Intention Letters (message)

Purposes of a LOI

Specific examples

See also

References