Letters of Intent: What Is Binding and What Is Not

A letter of intent (LOI) outlines the main terms two sides expect in a deal before a full contract is signed. Parts of it can still bind you, so wording matters.

What an LOI usually contains

• The parties and the deal in brief, such as a sale, lease or partnership.
• Price or pricing method and key terms.
• A timeline and conditions such as due diligence or financing.
• Confidentiality and exclusivity or no-shop terms.
• A statement of which parts are binding.

Binding versus non-binding

Many LOIs say the business terms are non-binding but that confidentiality, exclusivity and costs provisions are binding. Courts look at the actual language and conduct, so say clearly what you intend and avoid promises you do not want enforced.

Mistakes to avoid

• Vague terms that look like a final agreement.
• Agreeing to long exclusivity without a deadline.
• Skipping confidentiality when you share sensitive information.
• Treating an LOI as a substitute for a contract.

Next steps

1. Agree on the key terms.
2. Mark binding and non-binding provisions.
3. Set an expiration date.
4. Have a lawyer review for large deals.

Why parties use letters of intent

A letter of intent records the main terms of a deal while the parties continue to negotiate and investigate. It lets a buyer or investor show serious interest, sets a timeline and, if it contains binding clauses, protects sensitive information and discourages the seller from talking to others. In complex deals such as a business sale, real estate transaction or joint venture, the letter often comes before weeks or months of due diligence and drafting.

Typical provisions

• Description of the transaction and the parties.
• Purchase price or valuation method and how it will be paid.
• Structure, such as asset purchase or equity purchase.
• Due diligence rights and timeline.
• Conditions to closing, such as financing and approvals.
• Exclusivity or no-shop period.
• Confidentiality.
• Expenses and break-up terms.
• Governing law and a date when the letter expires.

Making binding and non-binding parts clear

1. State in one place which sections are binding, such as confidentiality, exclusivity and governing law.
2. State that all other terms are non-binding and that no deal exists until a definitive agreement is signed.
3. Avoid wording such as "the parties agree to purchase" in the non-binding parts.
4. Avoid conduct that suggests a final deal, such as moving staff or announcing the deal before signing.
5. Set an expiration date.

Risks to understand

Courts have found liability when parties negotiated in bad faith or breached binding provisions in a letter of intent, even though the main deal was never signed. An exclusivity clause can lock a seller out of other offers for weeks. A buyer may spend significant money on due diligence and lose it if the seller walks away. Consider limits on exclusivity and agree how costs are shared if the deal fails.

After the letter

• Start due diligence promptly.
• Draft the purchase or definitive agreement.
• Keep negotiating in good faith.
• Update the timeline if needed.
• See our guides to selling a small business and contract termination agreements.

Frequently asked questions