A letter of intent, also known as a “letter of interest” confirms two parties’ intention of doing business with each other at a later point in time. Generally a non-binding form, it establishes the fundamental terms of the deal until the parties draft a more comprehensive agreement.
A letter of intent is a simple agreement used as the precursor to a business transaction. It can be binding or non-binding depending on the intentions of the parties and the contents of the letter. A letter of intent is also used by employees to state their desire to work for a company, regardless of whether the organization has any open positions.
The letter includes the service or goods that will be exchanged, the purchase price, when payment must be received, and any contingencies that must be met.
A letter of intent can be binding or non-binding depending on how the letter is structured. A binding agreement is one that can be enforced by a court of law. If a party backs out of a binding contract after signing, they can be held liable for damages. Binding letters reflect the more comprehensive agreement to be signed later on. This includes clauses that are definite, such as a closing date or a payment due date. Restrictive covenants such as a non-competition or non-disclosure are common as well.
A non-binding agreement is more casual in nature and used to symbolize two parties’ intention to work on a deal. Either party can back out of a non-binding LOI without legal consequences. Non-binding letters are generally shorter, not overly-detailed, and contain provisions that accentuate the mutual understanding it is not a finalized deal.
- Parties – The names and mailing addresses of the buyer and seller.
- Property / Services – The goods or services the buyer receives in exchange for payment.
- Purchase Price – The agreed-upon amount ($) the buyer will pay the seller for the goods or services.
- Payment Due Date – When the buyer will be obligated to make payment (e.g., upon signing, by a specific date, etc).
- Deposit Contingency (Optional) – A deposit made at the time of signing to secure the buyer’s right to the services or goods.
- Financing Contingency (Optional) – Prevents the contract from moving forward unless the buyer is able to obtain financing. Often required if the goods or services are exceptionally valuable (i.e., a home).
- Signatures – A formality for non-binding letters and a requirement for binding forms. Signing is recommended for all letter types regardless of the party’s intentions.