What Is It?
Also known as a term sheet, memorandum of understanding, agreement in principle, and other names, the Letter of Intent (LOI) outlines the basic terms of a transaction: total compensation, TI Allowance, lease lengths, payment schedules, warranties, liabilities, physical conditions, etc. It is typically used in three types of transactions: purchase and sales, leases and loans. The parties on each side discuss the terms of the transaction and document the agreed upon terms. Letter of Intent terms can either be binding or non-binding.
The LOI’s primary advantage is that it allows each party to move forward and focus on the essentials without having to determine the specific legal terms. With the essential terms identified and agreed upon, each party feels more committed to the transaction and less likely to try to renegotiate the terms established in the LOI at a later date.
The biggest risk with letter of intent terms is that one party may shop the deal around. However, this can be avoided with non-disclosure language. Another potential disadvantage is determining the duties of each party. The LOI does not contain all the obligations of each party. Conflict can arise when it comes time to determine who is responsible for what.
Binding vs Non-Binding- Letter of intent terms can either be binding or non-binding. Be sure that you know if the LOI you are working with is one or the other and honor that language.
Expiration Date- An LOI cannot be left open-ended. There must be a specific expiration date upon which the terms listed in the LOI expire.
Confidentiality and Non-Disclosure Clauses– During negotiations, both parties are likely to disclose very confidential information about their business. This information can be safeguarded by using a confidentiality and non-disclosure clause that keeps each party from disclosing any confidential information.