Drafting letters of intent for acquisitions, leases, partnerships and other prospective transactions.
The function of a letter of intent
A letter of intent sets out the key terms the parties expect a future definitive agreement to contain, giving both sides a framework to negotiate against and a signal of serious intent before committing the time and expense of full due diligence and definitive documentation. It is used most commonly in business acquisitions, commercial leases and significant partnership or investment transactions.
Binding and non-binding provisions must be separated clearly
The most important drafting principle in a letter of intent is precision about which provisions bind the parties immediately and which remain subject to negotiation and a future definitive agreement. Courts look to the actual language and the parties' conduct, not the document's title, to determine whether a particular provision was intended to be enforceable.
- Typically non-binding: the purchase price or key economic terms, structure and other business terms, expressly subject to negotiation of a definitive agreement and completion of due diligence.
- Typically binding: confidentiality obligations, exclusivity or 'no-shop' commitments, allocation of transaction costs and governing law.
- A general non-binding statement should be reinforced by consistent language throughout the document, avoiding terms like 'shall' or 'agree' in describing provisions meant to remain preliminary.
Exclusivity and 'no-shop' provisions
Buyers frequently request an exclusivity or no-shop period, during which the seller agrees not to solicit or negotiate with other prospective buyers while due diligence and definitive documentation proceed. This is one of the provisions most commonly made binding in an otherwise non-binding letter of intent, since the buyer's willingness to invest in due diligence often depends on that protection.
What a letter of intent typically covers
- Identification of the parties and the general structure of the proposed transaction.
- Key economic terms, such as proposed purchase price, payment structure, or lease economics: usually expressed as non-binding.
- Timeline for due diligence and target date for a definitive agreement.
- Conditions to closing anticipated at a high level, to be detailed further in the definitive agreement.
- Confidentiality, exclusivity and cost allocation provisions.
From letter of intent to definitive agreement
The letter of intent frames the deal; the definitive agreement (a purchase agreement, lease, or partnership agreement) actually creates the binding transaction. Due diligence conducted during the period between signing the letter of intent and finalizing the definitive agreement often surfaces issues that require renegotiating terms outlined in the letter of intent, which is precisely why the economic terms are typically kept non-binding.
Answers
Frequently asked questions
- Is a letter of intent legally binding?
- Generally, the substantive business and economic terms are drafted as non-binding, subject to a future definitive agreement, while specific provisions, most commonly confidentiality and exclusivity, are made binding. The actual language of the document controls, not its title.
- Can I walk away from a deal after signing a letter of intent?
- Typically yes, with respect to the non-binding business terms, since the letter of intent is generally structured to leave the parties free to not proceed to a definitive agreement. Any binding provisions in the letter of intent, such as confidentiality or exclusivity, remain enforceable regardless of whether the deal proceeds.
- What is a 'no-shop' or exclusivity provision?
- It is a commitment, usually by the seller, not to solicit or negotiate with other prospective buyers for a defined period while the parties pursue due diligence and a definitive agreement. It is one of the provisions most commonly made binding even in an otherwise non-binding letter of intent.
- Do we need a letter of intent before starting due diligence on a business acquisition?
- A letter of intent is common practice before significant due diligence begins, since it confirms the key deal terms and secures exclusivity or confidentiality protections before either party invests substantial time and expense in the process.
- How is a letter of intent different from a definitive purchase agreement?
- The letter of intent outlines the anticipated terms of a transaction, largely on a non-binding basis, while the definitive purchase agreement is the fully negotiated, binding document that actually creates and closes the transaction after due diligence is complete.
Official sources
Consult the official sources above for current rules and procedures.