Letters of Intent

| 4 min read

A letter of intent (often abbreviated to LOI) is a document that records the intentions of parties who are considering entering into a legally binding agreement.

Letters of intent are more commonly used in business transactions than for personal legal issues.

Most commonly, they are used where:

  • discussions of terms take place over a period of time and an aide-memoire of what was agreed at each round is helpful for resuming at a later date
  • different groups of people within a business are involved in discussing different matters, and there needs to be a record that pulls together all those different threads

An LOI is often in letter format, but it doesn’t have to be.

If a letter of intent is drafted as a skeleton agreement, it is more often called heads of terms (abbreviated to HoT). A letter format might more appropriate where intentions or reasons are recorded. Heads of terms tend to be a summary of the terms, organised in the same order that the points might flow within a final agreement.

Both documents provide the basis for a full draft agreement. An agreement based on heads of terms is one that is usually just fully fleshed out with legal points.

Letters of intent and heads of terms can be used at any time. Negotiations do not have to have finished for the document to be drawn up. An LOI can be drafted early on for use by one side as a reminder about what to discuss.

What does a letter of intent cover?

There is no required layout or structure. It can be as formal or informal as the parties like.

Typically, letters of intent and heads of terms will include:

  • the names and addresses of the parties
  • background to why the parties are negotiating (in other words, what are the parties seeking to happen)
  • details of the proposed agreement
  • rationale or explanation of a particular stance on issues (for example, that one party takes a particular view on an issue because it is unable to do otherwise because of regulations or commitments to other parties)
  • obligations of the parties
  • target date for completion and note of who will write the LOI or HoT into a full agreement
  • pre-conditions

Pre-conditions are things that must be done or produced before one party will sign the final agreement.

For example, it might be that regulatory approval is needed, or that some other deal or agreement needs to be made with another party.

A common pre-condition is that the deal is approved by a majority of shareholders in the company, or partners in a partnership.

Another common pre-condition is that one side is given the opportunity to conduct due diligence (DD). This is a process of reviewing the documents and systems of one side by the other. The aim is to satisfy the one carrying out DD what risks there are in the deal. Those risks might then able to be reduced by further provisions in the final contract.

For example, a due diligence process might identify whether contracts exist, whether the financial statements are true and fair, and whether anything adverse has happened in the past that might affect future performance.

Are letters of intent legally binding?

By itself, a letter is not legally binding, and is not a substitute for a full legal contract. Neither party is held to the contents.

One of the requirements for an agreement to be binding is that both sides intended to be bound. It would be very difficult to claim that points in an LOI that were a contract.

To make sure, a letter or HoT should start with the words “Subject to contract and without prejudice”. “Subject to contract” records that none of the content is contractually binding unless it is placed in another agreement. “Without prejudice” is a statement that the contents are not necessarily the parties last words on the matters.

So it is important that you do not rely on an LOI and take action before you have a contract in place. If you do start acting under it, you may find that the other side does not, leaving you at a disadvantage and no rights to have the other side do what they were going to do.

Be aware that just because a document is called a letter of intent by the other side, it might not be just that.

Some people wrap legally binding terms about how discussions are to proceed into a document that they call heads of terms or a letter of intent.

The sorts of things that you might be bound to do might include:

  • keep information discussed confidential in the same way that a confidentiality agreement or non-disclosure agreement would bind you
  • not to solicit employees, suppliers or customers in the same way that a separate non-solicitation agreement would bind you
  • not to negotiate a similar deal with anyone else for a reasonable period of time, in the same way that an exclusivity agreement would bind you

Please note that the information provided on this page:

  • Does not provide a complete or authoritative statement of the law;
  • Does not constitute legal advice by Net Lawman;
  • Does not create a contractual relationship;
  • Does not form part of any other advice, whether paid or free.
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