Also referred to as LOI, a letter of intent is a document whose purpose is to outline an agreement that has been reached between two or more parties prior to finalization of an agreement.

The agreements contained in the letter of intent vary depending on the kind of business deals that are being agreed upon. They may range from purchase of assets agreement, joint venture agreements, purchase of shares or land lease agreements.

A letter of intent will look similar to a written contract but the difference arises from the fact that the agreements reached therein are not entirely binding. However, many of these LOIs do contain provisions that are binding to the parties involved. These are provisions can include non-disclosure agreements (NDA) and agreements to deal in good faith. In other cases, the courts may deem it fit to interpret the LOI as being binding to the involved parties in the event that it bears very close resemblance to a formal agreement.

There are many reasons as to why LOIs are put into use.

  • One of these reasons includes clarification of key points in the event of a complicated transaction. This is usually done for the two parties’ convenience.
  • The second reason is to confirm officially that the parties are holding talks. This is most common in cases of joint venture or merger proposals.
  • Third reason is that, the letter of intent also serves as a safeguard in the event that a deal collapses midway through the negotiation process.

There are many areas where the application of the letter of intent can be put into action. They include academia, real estate and solicitation among other areas.

  • In academia or education, a LOI is mainly used during the process of application. A specific example is when athletes graduating from high school in the USA apply the use of LOI to reach an agreement between them and the colleges they wish to join.
  • In the real estate sector, potential buyers of property apply the use of LOI to inform the owners of such properties of their intent to buy the same.
  • In the solicitation of grants from the government, the use of a LOI is encouraged despite the fact that it’s not usually required and neither is it binding. It is mainly used by the agency staff in the performance of estimations with regard to the possible workload and thus helps in planning of the review.

Before beginning any complex transactions or agreements, it is usually important to officially begin with a letter of intent as it allows all the other interested parties to commence other processes.