A letter of intent is a letter from one company to another acknowledging a willingness and ability to do business. Often both parties involved in a business or commercial real estate transaction will sign a letter of intent before preparing a contract. Such letters are not contracts and cannot be enforced. They are merely documents stating serious intent to carry out certain business activities.
Letters of intent are often issued as acknowledgment of the fact that a merger between companies or an acquisition (i.e. purchase of property or a company) is seriously being considered. They may also be issued by a mutual fund shareholder to indicate that he would like to invest certain amounts of money at specified times. In exchange for a letter of intent, the shareholder will often qualify for reduced sales charges.
By signing a letter of intent (especially in a complex transaction) you know earlier on that you and the seller agree on the major terms of the deal. This will save you considerable time and expense when preparing the contract itself.
When drafting a letter of intent, you should make sure that the letter specifically states that it is not a binding agreement. Only the actual contract itself (which is typically written after drafting a letter of intent) should be binding. You want to be free to get out of the deal if, later, you and the seller cannot reach agreement on the details of the contract.
Letters of intent are typically extremely detailed documents that require meticulous drafting. Retaining an experienced business attorney to aid in the preparation of such documents is essential. An attorney can help you draft, or at least review, your letter of intent to make sure that all the major details regarding the transaction have been agreed on by both parties. Your attorney will also prove invaluable you later draft the official contract for the transaction.