Somewhere between a friendly conversation and a signed contract sits the letter of intent. It is the document you use when both sides are serious about a deal but not yet ready to commit to every detail. Used well, an LOI keeps momentum going and gets everyone aligned; used carelessly, it can bind you to more than you realised. The difference comes down to understanding what it is and how to write it. Here is what you need to know.
What a letter of intent is
A letter of intent, often shortened to LOI, is a written document that outlines the main terms of a proposed deal before a full contract is drawn up. It appears in all sorts of situations: buying a business, leasing commercial property, entering a partnership, or agreeing the outline of a large purchase. Its job is to put the key points on paper, show good faith, and give the lawyers a framework to turn into a binding agreement. It is the "here is what we are thinking" step before the "here is what we are committing to" step.
Is a letter of intent binding?
This is the question that matters most, and the answer is: usually not, but be careful. An LOI is generally intended as a non-binding statement of intent, meaning either side can still walk away. However, whether it binds depends on its wording, not its title, and a court may hold you to language that looks like a firm promise. That is why well-drafted LOIs say explicitly which parts are binding and which are not. Confidentiality and exclusivity clauses, for example, are often made binding even when the commercial terms are not.
What to include
A clear letter of intent usually covers:
- The parties and the purpose of the proposed deal.
- The key commercial terms: price, structure, and what is being bought or agreed.
- A timeline, including any target date for a final contract.
- Conditions that must be met, such as due diligence or financing.
- Which parts are binding, especially confidentiality and exclusivity.
- An expiry date for the LOI itself.
Why exclusivity is often the real point
Here is a detail that trips up first-time dealmakers. Often the single most valuable thing in an LOI is the exclusivity clause, sometimes called a no-shop clause, in which one side agrees not to negotiate with anyone else for a set period. If you are the buyer investing time and money into due diligence, exclusivity protects you from doing all that work only to have the seller take a better offer at the last minute. If you are the seller, granting exclusivity is a real concession, so it should come with a genuine commitment from the other side. Understanding who benefits from this clause tells you a lot about the balance of the deal.
How an LOI moves a deal forward
Beyond the legal detail, an LOI does something practical: it forces both sides to agree the big points before spending money on lawyers and due diligence. It is far cheaper to discover a dealbreaker at the LOI stage than halfway through drafting a fifty-page contract. It also signals seriousness, which matters when a seller is choosing between interested parties or a landlord is weighing tenants. Think of the LOI as the moment a deal stops being a conversation and starts becoming real, while still leaving room to walk away if the details do not hold up.
Keep the binding and non-binding parts clearly separate
If there is one drafting habit worth taking from this article, it is this: make the letter say explicitly, in its own words, which sections bind the parties and which do not. A short paragraph near the end stating that the commercial terms are non-binding and only the confidentiality and exclusivity clauses are binding removes almost all the risk that catches people out. Without it, a court is left to interpret your intentions from the general wording, and you may be held to a "deal" you thought was still just a discussion. Spelling it out costs you nothing and protects you completely. When the letter of intent is clear about its own force, both sides can negotiate freely, knowing exactly what they have committed to and what remains open.
Frequently asked questions
Is a letter of intent legally binding?
Usually it is intended to be non-binding, but that depends on the wording. State clearly which parts, if any, are binding to avoid being held to more than you intended.
What is the difference between an LOI and a contract?
An LOI outlines the proposed terms and intent to deal, while a contract creates the full, enforceable obligations. The LOI usually comes first.
Why include an exclusivity clause?
It stops the other side negotiating with competitors for a set period, protecting a buyer who is investing in due diligence. It is often the most important part of an LOI.
How long is a letter of intent valid?
For as long as you state. A good LOI includes an expiry date so it does not linger indefinitely if the deal stalls.
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