The letter of Intent is a legally written document that declares the initial commitment & understanding between two or more parties intended to be formalized later into an agreement. The concept of the Letter of Intent (LOI) is similar in content to the Memorandum of Understanding (MOU), Term Sheets, etc. The difference is that while LOI is normally presented in the format of a letter the MOU’s, term sheets, etc., resemble a spreadsheet.
The LOIs forms the initial material in going forward in forging an agreement in several business transactions. They range from merger & accusations agreements, real estate property lease agreements, joint venture agreements, etc. & in many other categories.
The Letter of Intent is usually not binding as it’s an interpretation of the intended business proposal of two or more parties in legal writing. This agreement to agree with the letter is generally time-bound & can be canceled at any time by any of the parties.
However, some of the LOIs such as non-disclosure agreements (NDAs) are binding where both parties agree to keep the components of the business deal confidential. No-solicitation provisions are also featured in some LOIs to avoid poaching by both parties.
The Provisions for LOIs:
- Nature of Business: The LOIs should describe the details of the proposed business deal with a description of the business. The letter should also contain the parties’ names & addresses, effective date of the letter & should be time-bound.
- Asking Price: The asking price should be included in the LOIs in case of a sale of property or other effects. The original asking price though not final to be included in the LOIs, paving the way for further negotiation.
- Approval: Compliance of parties should be mentioned in the LOIs of matters such as any improvement to the property on sale or the buyer’s mode of payment methods before the sale.
- Verification: The LOIs should mention verification of all original documents connected with the sale or any project.
- Non-disclosure Agreement: Including the NDAs in the LOIs helps in protecting trade secrets shared during the negotiation process.
- Non-competent Agreement: Including the non-competent agreement in the LOIs disallows parties from using the information received about one another during negotiations. This prevents parties from using it against each other in the face of competition.
- Non-solicitation Agreement: Including the non-solicitation agreement in the LOIs help parties from poaching employees and prevent communicating with each other’s clients or customers.
- Time-Bound: The LOIs should be time-bound. The timeline for the negotiation process should be included in the LOIs for a smooth & speedier passage.
- Binding or Nonbinding Agreement: The LOIs specifies the legal parts of the agreement binding to both or more parties.
- Signature: The LOIs should be signed by all the responsible parties involved in that business deal.
The objective of LOIs:
The purpose of the Letter of Intent will vary with different parties & business. Generally, the LOIs are meant to shape up the initially tabled agreeable terms before negotiating to finalize the deal’s finer points. The LOI is also indicative of two or more parties going forward with a secret deal such as a merger or a joint venture (JV).
The overall aim of the Letter of Intent:
- Clarify the key points of the transaction being negotiated.
- Protecting all the parties involved in the business deal.
- The LOIs projects the nature of the transaction whether a merger or a joint venture between companies.
Example: Create a Letter of Intent:
A letter of intent can be written by your-self & put up for review by an attorney. You could use an online service provider to draft the LOI while making sure that it meets that state’s requirements. A letter of intent sets boundaries for any business deal & helps in clarifying the requirements & terms while going forward in making it a reality.
In business deals, the company’s legal team drafts the LOIs outlining the details of the intended business. For example, in case of a merger & accusations (M&A) exercise, the LOIs emphasize the mode of payment, cash or stock deal, when taking over another company.
Other than business, the LOIs apply to other exercises, such as parents jotting down the expectations for their children in their LOIs, to be used if both parents die. The LOIs though not a legal-document like wills, might be helpful while deciding the children’s fate under such circumstances in a family court.
The LOI is also applicable in the field of education, especially while applying for a scholarship, a particular job, or for admission into a specific institute or company.
The letter of intent in the field of education is called a statement of purpose (SOP).
The LOIs seeking government grants or scholarships in highly sought after high school or university have to be written in an essay.
The letter of intent scholarship essay should be written describing the candidate reasons for applying in that particular course or the program.
The Advantage & Disadvantages of the Letter of Intent:
A temporary agreement written between parties is the letter of intent. All key terms & conditions up to that point are recorded in the letter of intent. Similar terms for a letter of intent include Memorandum of Understanding (MOU), Agreement in Principle & Indication of Interest.
A well-drafted LOIs become instrumental in binding the important parts mentioned in the agreement. Terms such as non-solicitation, exclusive negotiating rights & confidentiality are some binding parts contained in a letter of intent.
- The LOI helps in maintaining a timeline before finalizing post negotiations.
- The terms & conditions of the business deal are structured in the letter of intent.
- The main key issues of the deal are identified in the LOIs making it easier to close the deal.
- A badly drafted LOIs could become problematic & can create potential damage if the deal is not completed.
- The LOIs not drafted properly could become problematic for both or all parties.
- A badly drafted LOIs sometimes can incur unintended liabilities & face potential establishment damages if not mentioned properly.
The LOI or the Intended Letter of Agreement:
The LOI or the intended Letter of Agreement is an initial non-binding agreement that proceeds to a future binding agreement specifying parties’ intentions & expectations. In short, it specifies the intention of the parties going forward in completing the deal. Even though used mainly in business transactions, the letter of intent has many other uses:
· When buying out a Business Enterprise:
When dealing in the business of purchase another entity the LOIs is created specifically to address the conditions of purchase. This might include the liabilities or purchase price of assets or shares. It could also include schedules such as mode of payment, depository amount & financing. If agreed upon, then both seller & buyer can go forward with an agreement benefiting both.
· Merger or Joint Venture:
This involves two or more businessmen who independently forge a joint venture deal for a project or a transaction, for that period. Since the transfer of ownership is not required in a joint venture or a merger then the LOIs focus more on confidentiality details. It includes contributions of the stated companies & other terms and conditions for the strategic alliance. Once understood & agreed upon then the joint-venture agreement is signed in making it a reality.
· Buying: Real Estate:
The LOIs shows real intent when purchasing a commercial or residential property. It gives allowance to the seller for negotiations before finalizing the purchase agreement. A LOIs in real estate covers the purchase price, inspection period & very importantly the payment plan including a closure date for accepting the offer.
· Lease: Real Estate:
The LOI is normally signed before a lease agreement, especially in big property ventures like the lease of a building. The LOIs in this case signifies the probable rental rates, considerations, rules, and regulations of the tenancy.
The LOIs can be used in many levels of competitive sports and very popular among the National Collegiate Athletic Association (NCAA). The LOI of a student assures him of a full year of financial aid while not ensuring admission into the college. It also does not disallow other academic facilities from contacting him for recruitment.
· Will & Testament:
A will & a testament is a very important document about properties & effects post someone’s or a parent’s death. Even the LOIs could become the guardian angel to the will without making amendments to it. The LOIs in connection with a will have huge importance as they transpire to the hopes & values expected from their children, even if the parents are no longer around to see.
A LOIs in a case seeking employment is more like a letter of interest describing why he favors the position along with references to his gained skills & experience.
A LOIs especially in scholarship, loan, or grant is referred to as a financial letter of intent explaining the reason for the fund & the way he plans to use the money.
When applying for a scholarship to a university or a graduate school, LOIs are requested from the student asking for reasons for focusing on certain programs. The LOI helps the institution determine the student’s academic goals & career foresight in admitting him into the program.
· Building & Construction:
Agreements usually take more time in the field of construction. That is why the LOIs works more in amending the terms about liability, services, payment, & confidentiality, etc. before formalizing the official agreement. This is due to the Governmental deadlines & various other authority permissions required while starting the project. The risks involved in the LOIs related to construction are huge & normally non-binding, paving the way for an immediate formal agreement.
The Letter of Intent (LOI), simply said, is a letter that documents the terms & conditions of a prospective deal.