Letter of intent: what it is and what to include

What a letter of intent is

A letter of intent, often abbreviated LOI, captures the shape of a deal in writing before the parties invest the time and legal cost of drafting a full contract. It is common in mergers and acquisitions, commercial real estate, joint ventures, supply and distribution arrangements, and financing, where each side wants to confirm alignment on price, structure, and timing before deeper due diligence begins. The document goes by several names, including memorandum of understanding (MOU), heads of terms, and term sheet. The labels differ, but the function is similar: to summarize intent and set the agenda for the negotiation that follows.

The defining feature of a letter of intent is its mixed legal character. Under US contract law, most substantive terms are framed as non-binding statements of intent, which means neither side can compel the other to close on those terms alone. Certain provisions, however, are typically meant to be enforceable from signature, and courts examine both the language used and the parties’ conduct to decide whether a binding obligation was created. Because that line can be blurry, being explicit about what binds and what does not is the single most important drafting decision in the document.

Key terms and clauses to include

A well-drafted letter of intent balances enough detail to guide the deal against enough flexibility to keep the parties free to walk away. The clauses below are the ones most negotiators expect to see.

• Parties and transaction summary. Identify each party by legal name and describe, in plain terms, the transaction being contemplated (an asset purchase, a lease, a supply relationship, an investment).
• Deal structure and price. State the proposed price or valuation and the payment mechanics, or, when numbers are not yet fixed, the method and assumptions for determining them.
• Binding versus non-binding provision. Include an explicit clause stating which sections are legally binding and which are only statements of intent. This is the clause that prevents the most expensive disputes.
• Confidentiality. Protect the information exchanged during negotiation, since due diligence often reveals sensitive financial, customer, and operational data.
• Exclusivity or no-shop. Give the buyer or investor a defined window during which the other side agrees not to solicit or negotiate competing offers.
• Due diligence scope. Describe the access, records, and cooperation each side will provide, and the period allowed for review.
• Conditions to signing. List the gating items, such as financing, board or shareholder approval, or regulatory clearance, that must be satisfied before a definitive agreement is executed.
• Timeline and milestones. Set target dates for due diligence, drafting, and signing so the process keeps momentum.
• Expenses. State whether each party bears its own costs or whether a break fee applies if one side walks away.
• Governing law and dispute resolution. Choose the state law that governs the letter and how disputes over the binding provisions will be resolved.
• Expiration and termination. Set a date on which the letter of intent lapses if a definitive agreement has not been signed, and describe how either party may terminate it.

When you need one

You do not need a letter of intent for every transaction, but it earns its place whenever a deal is complex, high-value, or likely to run over a long negotiation. In mergers and acquisitions it signals serious intent and frames the diligence process. In commercial real estate it lets landlord and tenant agree on rent, term, and improvements before lawyers draft the lease. In financing rounds a term sheet performs the same role for investors and founders.

A letter of intent is also useful when a party needs something concrete to move an internal process forward, such as securing board approval, arranging financing, or justifying the cost of due diligence to stakeholders. It can help surface deal-breakers early, because putting price and structure in writing often exposes gaps in understanding that a handshake conceals. For small, routine, or fully priced transactions, by contrast, jumping straight to a definitive contract is usually faster and cleaner.

Common pitfalls

The most frequent and costly mistake is ambiguity about whether the letter binds the parties. A letter that reads like a contract, is signed, and is followed by performance can be enforced as one even if the parties assumed it was merely preliminary, so the binding-versus-non-binding clause must be unmistakable.

A second pitfall is the “agreement to agree.” Language promising to negotiate the remaining terms in the future is often unenforceable, and in some states it can still trigger a duty to negotiate in good faith, which creates liability the parties did not anticipate.

Other recurring problems include over-specifying terms, which can accidentally lock a party into a position before due diligence is complete; omitting confidentiality or exclusivity, which leaves a party exposed while it invests in the deal; and failing to set an expiration date, which leaves a stale letter hanging over a transaction that has moved on. Signing without internal authority is another frequent error, since a letter executed by someone without approval can create confusion about whether the company is actually committed.

From letter of intent to disciplined contract management

A letter of intent is only the first document in a chain that runs through the definitive agreement to renewals, amendments, and expiration. Treating it as a governed record rather than a loose email attachment keeps its binding obligations, such as confidentiality, exclusivity, and any negotiated deadlines, visible and enforceable. A contract lifecycle management platform such as Pactolane can hold the letter in a central repository, route it through approval workflows so that only authorized signers commit the company, and capture eIDAS electronic signatures with a full audit trail. Renewal and deadline alerts keep exclusivity windows and diligence milestones from lapsing unnoticed, and PactAI can produce an executive summary of the letter, answer questions about its terms through conversational chat, and score its risk from 0 to 100 so the human can decide with the full picture in view. Managed this way, a letter of intent becomes the disciplined starting point of a deal rather than a loose end.