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A letter of intent (LOI or LoI, or Letter of Intent) is a document outlining the understanding between two or more parties which they intend to formalize in a
legally binding agreement
legally binding agreement
. The concept is similar to a heads of agreement,
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or
memorandum of understanding A memorandum of understanding (MoU) is a type of agreement between two (bilateral Bilateral may refer to any concept including two sides, in particular: *Bilateria, bilateral animals *Bilateralism, the political and cultural relations between ...
. Such outlined agreements may be merger and acquisition transaction agreements, joint venture agreements, real property lease agreements and several other categories of agreements that may govern material transactions. The capitalized form ''Letter of Intent'' may be used in legal writing, but only when referring to a specific document under discussion. LOIs resemble short, written
contract A contract is a legally binding agreement that defines and governs the rights and duties between or among its parties Image:'Hip, Hip, Hurrah! Artist Festival at Skagen', by Peder Severin Krøyer (1888) Demisted with DXO PhotoLab Clearview ...

contract
s, often in tabular form. They are not binding on the parties in their entirety. Many LOIs, however, contain provisions that are binding, such as those governing non-disclosure, governing law,
exclusivity Exclusivity may refer to: Concepts *Exclusivity (religion), the ubiquitous stance in religion of asserting unique veracity *Mutual exclusivity, if two propositions or events cannot both be true *positioning (marketing), Exclusive positioning, a mar ...
or covenants to negotiate in
good faith Good faith ( la, bona fides), in human interactions, is a sincere intention to be fair, open, and honest, regardless of the outcome of the interaction. While some Latin phrases have lost their literal meaning over centuries, this is not the cas ...
. A LOI may sometimes be interpreted by a court of law as binding the parties to it if it too-closely resembles a formal contract and does not contain clear disclaimers. A letter of intent may be presented by one party to another party and subsequently negotiated before execution (or signature). If carefully negotiated, a LOI may serve to protect both parties to a transaction. For example, a seller of a business may incorporate what is known as a non-solicitation provision, which would restrict the buyer's ability to hire an employee of the seller's business should the two parties not be able to close the transaction. On the other hand, a LOI may protect the buyer of a business by expressly conditioning its obligation to complete the transaction if it is unable to secure financing for the transaction.


Purposes of a LOI

Common purposes of a LOI are: * To allow parties to sketch out fundamental terms quickly before expending substantial resources on negotiating definitive agreements, finalizing due diligence, pursuing third-party approvals and other matters * To declare officially that the parties are currently negotiating, as in a
merger In corporate finance Corporate finance is the area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the Value investing, value of the firm to the shareholders, ...
or
joint venture A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership Equity sharing is another name for shared ownership or ''co-ownership (disambiguation), co-ownership''. It takes one property, ...
proposal * To provide safeguards in case a deal collapses during negotiation * To verify certain issues regarding payments made for someone else (''e.g.''
credit card #REDIRECT Credit card #REDIRECT Credit card A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's promise to the card issuer to pay them for ...

credit card
payments) Potential downsides to using a LOI may include: * The parties may engage in protracted negotiations on only a subset of a deal’s terms * Management time and focus may be diverted * Alternative opportunities may be missed and markets may move against the parties during negotiations * Parties may reduce their lack of a workable deal framework into a LOI, with a hope of making progress later * Public disclosure obligations may be inadvertently triggered * The risk of leaks, exacerbated by the desire of some to tout the LOI to the world, or shop it to other parties In the UK
construction industry Construction is a general term meaning the art and science to form Physical object, objects, systems, or organizations,"Construction" def. 1.a. 1.b. and 1.c. ''Oxford English Dictionary'' Second Edition on CD-ROM (v. 4.0) Oxford University Pre ...
, it has been noted that "a significant element" within the industry appears to be "content to have their commercial and legal relationships defined on the basis of a letter of intent rather than by clear and definite contracts".Elder, N. (2006)
Letters of Intent and Quantum Meruit – Easy Street or Skid Row?
''Brant Associates'', published July 2006, archived 9 October 2007, accessed 11 August 2021


Specific examples

In
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academia
, a letter of intent is part of the application process, in which it is also known as a statement of purpose or application essay. In education in the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
, letters of intent are also frequently reached between high school senior athletes and colleges/universities, for the reservation of
athletic scholarship An athletic scholarship is a form of scholarship A scholarship is an award of financial aid Student financial aid in the United States is funding that is available exclusively to students attending a Higher education in the United States, ...
s for the athletes upon graduation from high school.
School administrator A head teacher, head instructor, headmaster, headmistress, head, chancellor, principal or school director (sometimes another title is used) is the staff member of a school with the greatest responsibility for the management Management (or man ...
s in
secondary education Secondary education covers two phases on the International Standard Classification of Education The International Standard Classification of Education (ISCED) is a statistical framework for organizing information on education Education i ...
often require a letter of intent before approving the formation of a
student club A student society, student association, university society or student organization is a society A society is a group A group is a number A number is a mathematical object used to counting, count, measurement, measure, and nominal number ...
. In
real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more genera ...

real estate
, in cases where the
real property In England, English common law, real property, real estate, realty, or immovable property is land which is the property of some person and all structures (also called Land improvement, improvements or Fixture (property law), fixtures) integr ...
in question is not listed on a
multiple listing service #REDIRECT Multiple listing service A multiple listing service (MLS, also multiple listing system or multiple listings service) is an organization with a suite of services that real estate brokers use to establish contractual offers of cooperation an ...
, there may not be an easy way to notify the owner of the property and other interested parties of intent to purchase. Often it is necessary to officially begin the process of a purchase, and allow all peripheral interested parties to begin any other processes, with a letter of intent. For example, a multimillion-dollar loan for a commercial property may require a letter of intent before a financial institution will allow personnel to spend time working on said loan necessary for the completion of the sale. The same may be followed at the time of purchase by any company. A tenant and landlord may sign a letter of intent prior to signing a lease agreement to stipulate rental rates and all regulations of the future tenancy. In the
solicitation Solicitation is the act of offering, or attempting to purchase, goods and/or services. Legal status may be specific to the time or place where it occurs. The crime In ordinary language, a crime is an unlawful act punishable by a state or ...
of government grants, a letter of intent is highly encouraged but it is not required or binding, and does not enter into the review of a subsequent application. The information that it contains allows agency staff to estimate the potential workload and plan the review.Typical example:


See also

*
Letter of comfort (contract law)A letter of comfort, sometimes called a "letter of intent", is a communication from a party to a contract to the other party that indicates an initial willingness to enter into a contractual obligation absent the elements of a legally enforceable con ...


References

{{DEFAULTSORT:Letter Of Intent Legal documents Intention Letters (message)