What Is A Letter Of Intent?
When used between individuals, businesses, or LLCs, a letter of intent allows each individual party to define the relationship and its parameters and establish goals or future plans without a formal legal arrangement. Although a letter of intent is not a binding agreement, it can serve as a show of good faith, and often, the terms set out in the letter of intent are incorporated into the final contractual agreement. For these reasons, in the business world it is very common to have a letter of intent drafted by a contract attorney, who can provide advice on the most advantageous terms and clauses to include. The attorneys at Roulet Law Firm. P.A. can assist with a letter of intent for a Minnesota or Florida business dealing. Call our Minnesota office at 763-420-5087 or our Florida office at 941-909-4644 to learn more about how a letter of intent can further your goals.
The Purpose of a Letter of Intent
In real estate and commercial purchases, the purpose of a letter of intent (LOI), also referred to as a term sheet, is to cover three key areas of the anticipated contract. These three areas, broadly speaking, are as follows:
- Terms and conditions of the agreement
- Pricing and other financial considerations
- Timeline for completion of the proposal or duration of the business agreement
While typically not a legally binding document, a letter of intent nonetheless sets out essential parameters of a business agreement, subject to negotiation. A good letter of intent contains enough specific details regarding the prospective deal that regulatory agencies such as the United States Federal Trade Commission rely on letters of intent as a form of documentation that allow them to review contracts for potential problems, such as violations of anti-trust laws.
Terms and Conditions
The terms and conditions of an agreement in a letter of intent are similar to the same structures found elsewhere, such as in phone contracts or various service subscriptions. One frequent inclusion is a “no-shop clause,” which according to the Institutional Limited Partners Association helps to ensure the exclusivity of the offer. A no-shop clause gives the buyer the opportunity to consider and complete the transaction without other bids to consider. The terms and conditions portion will also typically include specifics for both buyer and seller to complete their respective due diligence. Due diligence must be completed prior to signing the finished contract, so the terms and conditions laid out in the LOI will in this respect differ from those that eventually become part of the legally binding agreement.
Pricing will include not only the sale price of the business or real property but also the provisions for financing and payment. Pricing will also address provisions for any third-party funding or other seller financing, as external financial backing is a common element in sales of businesses and of real property.
A good LOI will need to establish the deadlines for due diligence completion, executing any official purchase agreement, and the transaction closing date. Depending on the complexity of the deal under negotiation and the factors to consider, the LOI may also include proposed provisions for updated schedules should the transaction not be completed by the specified date.
Identification of Document
Finally, in addition to the other three elements, a letter of intent should clearly state that it is a letter of intent and, therefore, not a legally binding contract. This can help avoid misunderstandings and underscore the document’s purpose as a “good faith” offer.
Reasons To Write a Letter of Intent
The letter of intent serves as an introductory offer or proposal. This type of document is generally structured as an outline that includes the terms of the proposed agreement and is most often used in a real estate or business transaction, although letters of intent do also have some non-business applications, such as indicating to a local school district that a child will be homeschooled.
Common functions for which an LOI is used include:
- Identify the terms of a proposed agreement early, and negotiate terms that may be problematic
- Concentrate negotiations on the most important terms
- Create consistency during negotiations
- Provide the ability to obtain third-party approval, if necessary
- Promote mutual understanding of key terms of the agreement
When Is a Letter of Intent Not the Best Choice?
There are some situations in which a letter of intent may not be the best option to reach your goals. Some of these include:
- If the transaction is very simple, then a letter of intent may add unnecessary steps to the process
- If spending time negotiating the terms of the LOI may negatively impact the timeframe for closing the deal
- If the letter of intent is not drafted correctly, then it may create binding obligations for one or both parties when neither party intended these
- If the letter of intent is not drafted carefully, its wording may diminish the negotiating position of either party to propose new terms during the course of negotiations
The experienced attorneys at Roulet Law Firm regularly assist our clients in drafting carefully nuanced letters of intent, tailored to the needs of their specific business and types of transactions. If you have received a letter of intent, one of our business attorneys may also be able to review the letter to ensure that it contains terms favorable to your interests, or advise you in terms to propose during negotiations. We can also examine the document’s wording to ensure that it is non-binding before you sign.
Florida Rules for a Letter of Intent
Each state has its own regulations for letters of intent. In Florida, even if both parties intend the letter of intent to be binding, a Florida court will often only enforce the terms of the agreement if all the elements of the deal are contained in the letter.
If the essential terms of the agreement are left open for negotiation in the letter of intent, then a Florida court may not enforce the agreement. The logic typically used in Florida for such cases is that an agreement with open-ended terms is essentially unenforceable.
Minnesota Rules for a Letter of Intent
The general rule in Minnesota regarding the enforceability of letters of intent is that they are unenforceable in court. Essentially, the LOI is an agreement for both parties to agree on the terms of the deal; non-binding options for an agreement are still open for negotiation.
Similar to their counterparts in Florida, therefore, Minnesota courts do not usually consider letters of intent to be legally binding because they do not constitute the final and complete agreement of both parties. However, the letter of intent can be enforceable if, in the letter, both parties agree to be bound by its terms.
When Is a Letter of Intent a Good Thing?
LOIs are most useful to identify the intentions of both parties to negotiate a deal. They create an agreement to discuss terms, and establish parameters under which each party may propose alternatives to the terms the other offers for consideration.
In a complex deal, one in which one party may be concerned about multiple bids or offers, a letter of intent may serve to place their offer before others, setting forth their good-faith agreement to enter into negotiations.