Letter of intent (LOI)

Definition

A letter of intent (LOI) in business and finance is a formal document that outlines the preliminary understanding between parties involved in a potential transaction or business arrangement.

What is a letter of intent?

The document serves as an initial expression of interest, indicating the key terms and conditions that the parties intend to negotiate further before finalising a formal contract or agreement. 

Generally, an LOI is considered non-binding, meaning that it does not create legal obligations on its own. Instead, it serves as a precursor to a formal agreement and provides a foundation for further negotiations.

Key elements of an LOI:

1. Identification of parties: An LOI clearly identifies the parties involved, including their names, roles, and contact information.
2. Purpose of the LOI: It specifies the purpose or subject matter of the intended business arrangement or transaction.
3. Terms and conditions: An LOI outlines the key terms and conditions that the parties wish to negotiate further. This may include financial terms, timelines, deliverables, and any other critical aspects.
4. Confidentiality: An LOI may include provisions regarding the confidentiality of information shared during negotiations.
5. Exclusivity or non-compete: In some cases, an LOI may contain clauses that restrict the parties from negotiating or engaging with other potential partners during the negotiation period.
6. Termination or expiry: It may specify circumstances under which the LOI will terminate or expire.

An LOI serves as a starting point for negotiations. It provides a structured framework for discussions, helping parties understand each other’s expectations and requirements.While an LOI is generally non-binding, it is crucial for parties to review the document carefully. Certain clauses within an LOI (such as confidentiality provisions) may be legally enforceable.

In business transactions, letters of intent (LOIs) are usually prepared by a company’s legal team to outline specific actions planned. For instance, in merger and acquisition (M&A) scenarios, LOIs specify whether a company intends to acquire another entity through cash payment or a stock transaction.

Once the parties reach mutual understanding on the terms outlined in the LOI, they proceed to draft a formal contract or agreement that incorporates the agreed-upon terms and is legally binding.

Example of a letter of intent

Dear [Recipient’s name],

Subject: Letter of intent for the purchase of [Property address]

I am writing to express our sincere interest in acquiring the commercial property located at [Property address]. This letter of intent outlines the basic terms and conditions under which we are prepared to proceed with the purchase.

1. Purchase price: The proposed purchase price for the property is [offered amount], subject to further negotiation and a comprehensive due diligence process.
2. Due diligence: We request a reasonable period to conduct due diligence, including but not limited to inspections, assessments, and a review of all relevant property document.
3. Closing date: The anticipated closing date for this transaction is [Proposed closing date], subject to the successful completion of due diligence and fulfilment of all closing conditions.
4. Earnest money deposit: To demonstrate our commitment to this transaction, we are prepared to provide an earnest money deposit in the amount of [deposit amount] within [number of days] days of mutual acceptance of this letter of intent.

This Letter of Intent is not a legally binding agreement, and our obligations are subject to the execution of a formal purchase agreement. We look forward to working collaboratively to advance this transaction and believe that the terms outlined herein provide a solid foundation for further discussions.

Thank you for considering our proposal. We are open to negotiating the terms and addressing any concerns you may have.

Sincerely,

[Your full name] [Your title]