How to Write a Letter of Intent

A Letter of Intent (LOI), sometimes called a memorandum of understanding or term sheet, is a document that outlines the preliminary terms of a proposed agreement between two or more parties before a definitive contract is executed. LOIs serve as a roadmap for negotiations, establishing the framework and key deal points that will eventually be formalized in a binding agreement. Understanding how to draft an effective LOI is critical because, depending on the language used, certain provisions within the document may create legally enforceable obligations even before the final contract is signed.

What Is a Letter of Intent?

At its core, an LOI is a written expression of intent to enter into a formal agreement. It captures the essential terms of a proposed transaction and signals that both parties are serious about moving forward. While LOIs are often described as non-binding, this characterization is only partially accurate. Most LOIs contain a mixture of binding and non-binding provisions, and courts have repeatedly held that parties can be bound by the terms of an LOI when the language demonstrates a clear intent to be bound.

The landmark case of Texaco, Inc. v. Pennzoil Co. (1987) illustrates the legal risks of treating an LOI carelessly. In that case, a jury found that Pennzoil had a binding agreement with Getty Oil based on a memorandum of agreement and press announcements, even though a definitive merger agreement had not been executed. Texaco was ultimately ordered to pay over $10 billion in damages for tortious interference with that agreement. This case remains a cautionary example for anyone drafting or negotiating an LOI: the language you use matters enormously, and ambiguity about whether the LOI is binding can lead to significant legal exposure.

When Do You Need a Letter of Intent?

Letters of intent are used across a wide range of transactions and contexts. Each situation carries unique considerations that should be reflected in the document.

Mergers and Acquisitions

In M&A transactions, an LOI typically precedes the definitive purchase agreement. The buyer uses the LOI to outline the proposed purchase price, deal structure (asset purchase vs. stock purchase), financing contingencies, due diligence requirements, representations and warranties, and the anticipated closing timeline. The LOI allows both parties to confirm alignment on major terms before investing significant time and legal fees in negotiating the definitive agreement. Binding provisions in M&A LOIs typically include exclusivity (no-shop) clauses, confidentiality obligations, and expense allocation for due diligence.

Real Estate Transactions

In commercial and residential real estate, LOIs are commonly used to outline the key terms of a proposed lease or purchase. A real estate LOI might specify the property description, purchase price or lease rate, earnest money deposit, inspection and financing contingencies, proposed closing date, and any special conditions such as seller financing or lease-back arrangements. Real estate LOIs help both buyer and seller confirm that fundamental terms are agreeable before engaging attorneys to draft a formal purchase agreement or lease.

Business Partnerships and Joint Ventures

When two companies are exploring a joint venture, strategic alliance, or business partnership, an LOI helps define each party's expected contributions, profit-sharing arrangements, governance structure, intellectual property ownership, and exit mechanisms. These LOIs are particularly important when the parties come from different industries or jurisdictions and need to establish a common understanding before investing in detailed legal documentation.

Employment and University Applications

In the employment context, an LOI may be issued by an employer to a prospective executive or key employee, outlining proposed compensation, title, start date, and key benefits before a formal employment agreement is negotiated. Universities also use letters of intent in the admissions process, where a prospective student indicates their intention to enroll, and in academic hiring for faculty positions.

Key Sections of a Letter of Intent

A well-drafted LOI should be comprehensive enough to guide the negotiation of the definitive agreement while remaining clear about which provisions are binding and which are not. The following sections are standard components of most LOIs.

Identification of the Parties

Begin by identifying all parties to the proposed transaction using their full legal names, addresses, and roles in the transaction. For business entities, include the state of formation and the name of the authorized representative who will sign the LOI.

Transaction Overview

Provide a clear, concise summary of the proposed transaction. This section should describe the nature of the deal, whether it is an acquisition, investment, lease, partnership, or other arrangement. State the subject matter of the transaction, such as the business being acquired, the property being leased, or the project being undertaken jointly.

Key Terms and Conditions

Outline the material terms of the proposed deal. Depending on the transaction type, this may include the purchase price or investment amount, payment structure and schedule, financing contingencies, representations and warranties each party will be expected to make, conditions precedent to closing, and any post-closing obligations such as indemnification or earnest money provisions. Be specific enough to provide meaningful guidance for the definitive agreement but avoid being so detailed that the LOI becomes the contract itself.

Due Diligence

Specify the scope and timeline for due diligence. In M&A transactions, the buyer typically requires access to the seller's financial records, tax returns, contracts, litigation history, intellectual property portfolio, employee records, and regulatory compliance documentation. The LOI should state the duration of the due diligence period, the types of information to be made available, and any conditions under which the buyer may terminate the transaction based on due diligence findings.

Exclusivity and No-Shop Clause

An exclusivity provision, also known as a no-shop clause, prevents the seller from soliciting, entertaining, or accepting competing offers during a specified period while the buyer conducts due diligence and the parties negotiate the definitive agreement. Exclusivity clauses are almost always binding provisions, even in otherwise non-binding LOIs. The typical exclusivity period ranges from 30 to 90 days, depending on the complexity of the transaction. From the buyer's perspective, exclusivity is essential to justify the time and expense of due diligence. From the seller's perspective, the exclusivity period should be as short as reasonably necessary to prevent the buyer from tying up the deal indefinitely.

Confidentiality

If the parties have not already signed a standalone non-disclosure agreement, the LOI should include a binding confidentiality provision. This clause obligates both parties to keep the terms of the LOI, the existence of the negotiations, and all information exchanged during due diligence strictly confidential. Even when a separate NDA exists, it is good practice to include a confidentiality provision in the LOI that cross-references the NDA and confirms that its obligations remain in full force and effect.

Timeline and Milestones

Set forth a proposed timeline for completing the transaction, including milestones for due diligence completion, negotiation of the definitive agreement, regulatory approvals if applicable, and the anticipated closing date. While timelines in LOIs are typically non-binding targets rather than firm deadlines, they create a shared expectation of pace and urgency that helps keep negotiations on track.

Termination

Specify the circumstances under which either party may terminate the LOI. Common termination triggers include expiration of the exclusivity period without execution of a definitive agreement, failure to agree on material terms within a specified timeframe, a material adverse change in the target business, or mutual agreement of the parties. The termination clause should also address what happens to binding provisions such as confidentiality and exclusivity after the LOI is terminated.

Binding vs. Non-Binding Provisions

The most critical drafting decision in any LOI is clearly distinguishing between binding and non-binding provisions. Failure to do so is the single most common source of LOI-related litigation.

Non-Binding Provisions

The substantive deal terms, such as purchase price, payment structure, representations and warranties, and closing conditions, are typically non-binding. These provisions express the parties' current understanding and intent but do not create enforceable obligations. The LOI should contain explicit language stating that these provisions are not intended to create binding obligations and that a binding agreement will only exist upon execution of a definitive written agreement.

Binding Provisions

Certain provisions in an LOI are almost always binding, regardless of whether the overall document is characterized as non-binding. These include confidentiality obligations, exclusivity or no-shop clauses, expense allocation provisions specifying which party bears the costs of due diligence and legal fees, governing law and dispute resolution clauses, and the provision specifying which sections of the LOI are binding. The LOI should clearly identify these provisions in a dedicated section and state that they will survive the termination or expiration of the LOI.

Legal Enforceability Considerations

Courts analyze several factors when determining whether an LOI creates binding obligations. The most significant factor is the language of the document itself. Clear, unambiguous statements that the LOI is non-binding (except for specifically identified provisions) provide the strongest protection against unintended binding obligations.

However, courts also look beyond the four corners of the document. The conduct of the parties, partial performance of the proposed terms, public announcements, and the overall context of the negotiations can all influence whether a court finds a binding agreement. In some jurisdictions, courts apply a multi-factor test that considers whether the parties expressly reserved the right to be bound only by a written agreement, whether there was partial performance, whether all essential terms had been agreed upon, and whether the complexity of the deal is the type that normally requires a formal document.

To minimize the risk of unintended binding obligations, include clear and conspicuous non-binding disclaimers, use conditional language such as "subject to" and "contingent upon" when describing deal terms, avoid language that suggests present agreement such as "the parties agree" or "it is agreed that" in non-binding sections, and ensure that both parties' attorneys review the LOI before it is signed.

Tips for Clear and Effective Drafting

Begin with a clear statement of purpose explaining that the LOI is intended to outline the proposed terms and facilitate negotiations toward a definitive agreement
Use separate sections or a dedicated clause to identify which provisions are binding and which are not
Avoid ambiguous language that could be interpreted as creating present obligations rather than expressing future intent
Include a merger clause stating that the LOI, together with any referenced NDA, constitutes the entire agreement between the parties regarding the subject matter of the negotiations
Set realistic timelines that account for due diligence complexity, regulatory requirements, and the availability of decision-makers
Address break-up fees or expense reimbursement if applicable, particularly in M&A transactions where the buyer invests significant resources in due diligence
Consider including a good-faith negotiation clause obligating both parties to negotiate the definitive agreement in good faith, while clarifying that this does not obligate either party to agree to specific terms
Have both parties initial or sign the LOI to confirm receipt and acknowledgment, even for non-binding provisions
Retain copies of all drafts and communications related to the LOI, as these may be relevant if a dispute arises about the parties' intent
Consult with legal counsel before signing any LOI, particularly in high-value transactions where the distinction between binding and non-binding provisions has significant financial implications

Using an online document generator like Forms Legal can help you create a well-structured letter of intent that includes all essential sections and clearly distinguishes between binding and non-binding provisions. This ensures your LOI establishes a solid foundation for productive negotiations while protecting your legal interests throughout the process.