Author : Sarah Nadon - Law Student
Edited By: Ryan Carson
What is a Letter of Intent?
Letters of intent, also known as an LOI, is a document used to negotiate between a buyer and a seller in various types of transactions. LOI’s outline the specific terms of a potential deal that will occur at some point. LOI’s are typically used to discuss aspects in the contract that can still be negotiated. One party may present a term in the LOI to which the other party may change or remove all together. The purpose of the letter of intent is so that when the formal deal is presented, there are no surprises within the contract.
Key Provisions in an LOI
Non-Binding
While it is typical that LOIs are not binding, they may include certain binding provisions within them. Certain provisions within a LOI like a price can be non-binding and can be further negotiated. Binding provisions are usually limited to the provisions that a party believes to be absolutely necessary during the negotiation period. These can include the governing law or a confidentiality clause that will help protect the seller.
In certain cases, parties may enter into an LOI that is completely binding. This typically occurs when the parties are motivated to complete the transaction. If the LOI is binding, parties must assure that their intentions are clearly reflected and that all requirements for a legal contract exist.
Confidentiality
If a transaction contains sensitive information, the parties will want to assure that the information is kept private and ensure that both parties maintain confidentiality. It is common in transactions that confidentiality agreements already exist, therefore the LOI will simply acknowledge the existence of the confidentiality agreement and reinforce the terms of the agreement to assure that it is still in effect.
Term and Termination
LOI’s usually have a period of time or an event after which they terminate. This can include after signing. The term and termination should also include which provisions of the LOI survive the termination. Typically, this includes the governing law and the confidentiality agreement.
No Third-Party Beneficiaries
This clause states that third parties do not have enforceable rights under the LOI. The parties to the LOI should however decide whether or not they want third parties to benefit from the LOI.
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