A letter of intent is a written document that expresses a person or entity’s intention to do some activity or to clarify the terms of a potential purchase or other future transaction (usually involving a sale). These letters can sometimes be referred to as “intent to purchase letters”, “framework letters”, or “letters of assurance”.
Letters of intent are often used by parties involved in a business deal or commercial real estate transaction. The document allows the parties to form a non-binding, preliminary arrangement before signing a final contract.
Although letters of intent are generally considered non-binding, meaning they cannot be enforced, there are certain situations where a court may bind the parties to the terms of the letter of intent or enforce specific clauses provided in the letter. Such situations will be discussed in further detail in the sections below.
Finally, if you have any questions or need help drafting a letter of intent, you should speak to a local business attorney for more information and guidance.
When Are Letters Of Intent Typically Used?
Letters of intent can be used in a number of different situations. One of the most common scenarios in which a letter of intent may be used is when parties are entering into a business deal that involves a purchase (usually of a company). Businesses may also draft a letter of intent to record the terms of a future potential transaction, such as providing services or goods over a certain amount of time.
A letter of intent may also be used to sell property. For instance, a seller and potential buyer may draft a letter of intent before they finalize a real estate purchase agreement. Individuals buying and selling personal items may draft a letter of intent before executing a personal property purchase agreement as well. For example, if a potential buyer wants to purchase the seller’s car, the parties may create one.
However, a letter of intent can be used for more than just business transactions. It may also be used to express interest in a particular job or company, education program (e.g., graduate school), and/or to accept a scholarship.
What Is The Value Of A Letter Of Intent?
A well-drafted letter of intent can be a valuable tool to use when debating whether or not to enter into a complex business deal (e.g., purchasing a company). One advantage to drafting a letter of intent (as opposed to immediately signing a contract) is that it gives the parties some time to figure out if they will be able to work together and to know whether they are in agreement on the major points involved in the deal before signing the final contract.
Another benefit of using a letter of intent is that it identifies what parts of the deal will need to be negotiated, and allows the parties to walk away from the deal if it does not seem like either party will be able to compromise. It also puts a time limit on when the experimental period should conclude and a final transaction should take place.
Additionally, a letter of intent can be used as a protective measure. For instance, the letter can include terms that prevent the parties from entering into negotiations with other businesses, or it can shield a party from lawsuits like if a deal falls through because one of the requisite conditions was never satisfied.
On top of all of the advantages just discussed, the most important benefit that creating a letter of intent offers is that it will help the parties to save a considerable amount of time, resources, and expenses when it comes to drafting the final contract.
How Do You Write a Letter of Intent?
In general, letters of intent are meant to serve as the blueprints to the future version of the parties’ final contract. As such, they should be drafted as more of a guide and less of an official agreement.
Parties who draft a letter of intent that closely resembles a contract may find themselves bound to terms they did not agree to or do not want to include in the official contract. Thus, it is important to pay attention to how the document is drafted and the terms that it contains.
Below is a list of some basic guidelines and tips to follow when writing a letter of intent:
- Perform due diligence and conduct research on the other party;
- Be sure to identify the parties;
- Describe the deal in detail and what should be included or excluded from the transaction;
- Provide all agreed-upon terms (e.g., price, any specific clauses, special terms, etc.);
- Determine and state whether the letter should be binding or non-binding;
- Provide any conditions that were discussed (such as what must happen before the agreement is finalized);
- Use plain and clear language, and try to keep the document as concise as possible;
- Reference any significant time frames (e.g., closing date); and
- Be sure to review the document for errors and to check that all information provided is accurate prior to signing.
Are Letters Of Intent Binding?
Letters of intent are not considered legally binding agreements. Instead, they are documents that support an individual and/or entity’s showing of good faith. In legal terms, the phrase, “good faith” refers to a sincere intention to deal honestly and fairly with others (usually in relation to a business transaction or contract).
While letters of intent are usually not legally binding and are used more as an initial framework to test whether or not the parties can work well together under the existing terms, there are certain instances when a court may find that either provisions contained in the document or the document itself is legally binding.
For example, if the letter of intent does not include any disclaimers or appears too much like a formal contract, then it may become legally binding.
Some other requirements that may create a legal letter of intent include:
- Language that strongly suggests that the letter was meant to be binding;
- A history between the parties that shows they have treated similarly drafted letters in the past as being binding; and
- If the parties conduct business in a manner that comports with what is provided in the written expression of intent.
Additionally, some provisions in a letter of intent may be binding, such as those that cite to governing laws, can be found in non-disclosure agreements, or pertain to exclusive rights for good faith negotiations.
Do I Need An Attorney To Help Me Draft A Letter Of Intent?
Letters of intent tend to be extremely detailed legal documents that require careful planning and diligent drafting skills. Oftentimes, the main points included in a letter of intent are typically incorporated into the final business contract entered into by both parties. This is why retaining an experienced business attorney to aid in the process of preparing and drafting these documents is so crucial to a business and/or business relationship’s future success.
A business attorney in your area can help you draft, edit, and review your letter of intent to make sure that any and all terms regarding the business activities agreed upon by both parties are included in the document. This can help both you and your attorney save time later on when the letter of intent is converted into a final contract.