Drafting a letter of intent can be tricky: while it does have legal ramifications, the letter isn’t always a legally binding document. We’ll help you figure out whether you even need a letter of intent. And, if you do, we’ll walk you through a standard letter of intent section by section and let you know where the legal landmines are buried. We’ll also provide you with a downloadable and free letter of intent template you can use.
What Is a Letter of Intent?
A letter of intent is a kind of “pre-agreement” and comes before a legally binding contract. It states with clarity and brevity what kind of relationship the involved parties are entering into and what can be reasonably expected from both parties. The legally binding nature of letters of intent can change depending on how the letter is drafted, so it’s important to pay close attention to formatting.
There are dozens of different letter of intent templates out in the wild, but they often differ in how they define a “letter of intent.” Many of those templates are just cover letters for resumes or college applications. But what we’re talking about here is the legal use of the term, usually applied to real estate deals, acquisitions, and other business or legal agreements.
When Do You Need a Letter of Intent?
You need a letter of intent to signal, in advance, that you are entering the negotiations phase for acquisitions, mergers, or any large purchase of real-estate or chattel.
You need a letter of intent if . . .
- You’re engaging in a merger or an acquisition.
- You want to secure funding for a venture or a purchase but need some kind of good-faith agreement with a bank or financier that the deal is real.
You don’t you need a letter of intent if . . .
- You’re negotiating with multiple parties; a letter of intent generally implies that you are going forward with the agreed parties with a “no shop” provision.
- You’re worried about a leak. If your deal is extremely confidential, a letter of intent provides another avenue for a leak.
Once you’re sure you need a letter of intent, it’s time to draft one.
How to Write a Letter of Intent
Each step of writing a letter of intent (or using a letter of intent template) needs your attention. A misstep could lead to legal ramifications. We’ll take you through each section, from address and introduction, all the way to the final signature.
Correctly Address Your Letter of Intent
Addressing your letter in a clean, proper format shows all parties involved that you know what you’re doing. It may seem like a simple thing, but neglecting standard practices may send a message that you’re not intending to send.
To signify the nature of the letter, include the word “Confidential” in bold, and underline it. This should go at the top. It won’t be legally binding unless you include a confidentiality clause in the body of the letter, but it will help let all parties know right from the start that the information contained within is confidential.
Add your information. This should include the date, your name, your title, your company, and all relevant contact information.
Add the recipient’s info. Include their name, title, company, and address. Double-check this information for accuracy. It may be wise to have a second set of eyes review this section of the letter.
Write a simple subject line. Keep it clean and to the point, identifying the purpose of the letter and both parties clearly. Here’s a good example of the format:
- “Subject: Letter of Intent to RELATIONSHIP with PARTY X and PARTY Y”
Now we move to the body of the letter, starting with the intro.
Introduce Why You’re Sending the Letter of Intent
The next portion of the letter will be your basic introduction and a loose concept of why the letter of intent is being sent in the first place.
This section should achieve the following goals:
- Define both parties.
- Define the broad basis of the relationship.
- Describe the potential Transaction in only basic detail.
The next step is to identify any actions or negotiations that must be undertaken during negotiations, and before the Transaction.
Define the Actions That Need to be Taken to Move Forward
This section of your letter of intent will begin outlining the nuts and bolts of what’s needed to move forward with negotiations. It will describe what one or both parties must do, or what basic provisions need to be agreed to before a formal contract can be outlined.
Outline any action items for both parties. If further negotiation toward the Transaction is dependent on actions like due diligence, safety inspections, or title clearance, this section should describe them.
Create a time frame. How long do the relevant parties have to perform the action items listed above? This section should also outline how any delays or extensions can be handled. Don’t feel like you have to be specific with the time frame; something as simple as “before the Transaction” will suffice.
Outline Any Relevant Clauses, Stipulations, or Considerations
This final section of the letter’s body is for including any additional legal clauses that you may need to begin negotiations. This part of the letter may not be necessary; it outlines more complicated legal and business considerations. A letter of intent for a more informal, less complex, or low-stakes deal may not include this section.
Remember, the more legal language you add to this section, the more legally binding the letter of intent becomes. Choose wisely. Click on the links below to find sample clauses you can borrow from. Potential clauses might include:
- Confidentiality clauses
- Noncompete clauses
- Conduct in ordinary course clauses
- Limitation of liability clauses
- Proposed compensation details or price-setting for the incipient deal (if relevant)
Once you’ve finished this section, we move on to the final piece: signing the letter.
Signing the Letter of Intent
The keystone of the entire letter of intent is, of course, the signing phase. All parties involved must show their agreement (and liability) by putting their signatures on the final document. This can be done in person, of course, but there are easier, faster, and potentially more secure methods of both collecting and storing sensitive signatures and documents.
We recommend an electronic signature, not only because it is just as legally enforceable as a paper document, but also because it takes less time to get signed.
When an esignature is added to a PDF or other document through an app or an API like Signeasy, it is sent immediately to all parties. All parties are also notified when others sign the document (via text or email), and all parties are given copies of the final, signed letter of intent immediately.
The involved parties don’t even need a desktop — documents can be signed by Signeasy from mobile phones and tablets.
Legal Landmines to Watch for When Writing a Letter of Intent
We have a few warning signs to look out for when drafting or signing a letter of intent and a few suggestions to prevent your running afoul of either the legal system or unintended loopholes or clauses.
Overly complex or ambiguous language. Letters of intent should not be overly descriptive or include unnecessary language. This can create unintended promises that one or both parties may have to fulfill. It can also nullify the letter of intent if challenged in court. The contra proferentem rule, which is often used in contract disputes in court, states that any ambiguous language is to be interpreted to the disadvantage of the party that drafted the contract.
Confidentiality clauses. Define in the letter what information is confidential or otherwise privileged, and define who has access to that information.
Legally binding clauses. State in the agreement whether the letter of intent is legally binding or not. If it’s not stated either way, it’s often assumed that a letter of intent is legally binding. However, courts will often deal with contract disputes by ruling a letter of intent nonbinding if one or both parties have a history of nonbinding agreements.
The court may also judge how both parties acted after signing the letter of intent to decide whether the letter of intent was binding or not, whether or not one or both parties made an effort to fulfill the terms of the letter.
A letter of intent that’s too long. One of the most famous cases, one that made it to the Supreme Court, established that a memorandum or letter of intent that is exceptionally long or detailed can constitute a binding contract. In the case, Pennzoil v. Texaco, the letter of intent to merely begin negotiations to purchase stock at a specific price ended up being five pages long. When the seller sold the shares at a higher price than specified in the letter, and to a third party no less, a long court case established that a five-page memorandum might as well be a contract, and the Court enforced it as such.
Texaco was awarded over $10 billion dollars for the breach of contract, which all started with an overly long letter of intent.
Types of Transactions or Agreements Utilizing a Letter of Intent
Business Acquisitions or Mergers:
In the context of business acquisitions or mergers, a Letter of Intent functions as an initial agreement that outlines the intentions of the involved parties. It typically encompasses the proposed terms and conditions of the transaction, such as the purchase price, payment structure, due diligence requirements, and exclusivity provisions. The Letter of Intent serves as a foundation for further negotiations and as a basis for drafting the final agreement.
Real Estate Transactions:
In real estate transactions, a Letter of Intent is commonly employed to express a buyer's or investor's interest in a specific property. It outlines key terms, such as the purchase price, financing arrangements, contingencies, and proposed timeline for completing the transaction. By initiating the due diligence process, the Letter of Intent serves as a starting point for negotiating the final terms of the sale or lease agreement.
Joint Ventures and Partnerships:
When parties aim to establish a joint venture or partnership, a Letter of Intent can be utilized to outline the general terms and conditions of the collaboration. It defines the objectives, responsibilities, and contributions of each party, as well as the proposed governance structure and profit-sharing arrangements. This document sets the stage for negotiating detailed terms in a formal joint venture or partnership agreement.
Employment Agreements:
In the realm of employment agreements, a Letter of Intent can express the mutual interest of an employer and a prospective employee in entering into an employment relationship. It typically outlines essential terms such as job title, compensation, benefits, start date, and any specific conditions or contingencies. Serving as a preliminary agreement, the Letter of Intent provides a basis for further negotiations until a comprehensive employment contract is drafted.
Licensing and Technology Transfer Agreements:
When parties intend to license or transfer intellectual property or technology, a Letter of Intent can be employed to establish the intent to enter into a formal licensing or technology transfer agreement. It outlines key terms and conditions, including the scope of the license, payment terms, confidentiality obligations, and any specific restrictions or limitations. The Letter of Intent provides a framework for subsequent discussions and acts as a starting point for drafting the final agreement.
Non-binding vs. Binding Letters of Intent:
Letters of Intent can be categorized as either non-binding or binding, depending on the parties' intentions. A non-binding Letter of Intent expresses the parties' intentions and serves as a starting point for negotiations, without creating legally enforceable obligations. Conversely, a binding Letter of Intent includes provisions that establish legal obligations, such as exclusivity agreements, confidentiality obligations, or financial commitments. It is crucial for parties to clearly specify the binding and non-binding provisions within the document to avoid ambiguity and ensure mutual understanding. Seeking legal advice is important when drafting and reviewing binding Letters of Intent to comprehend the implications and potential enforceability of the provisions.
Download Your Free Letter of Intent Template
Now that you know how the letter of intent template works and you know where to be most wary of legal entanglements, you can grab our letter of intent template and start drafting. We wish you good luck on your big deal.
We’d also like to remind any readers that we are not lawyers, and though this template and blog were put together with advice from expert attorneys, neither document constitutes legal advice or representative council in any way.
