A letter of intent is a written document that outlines the key terms of a proposed deal before either side signs a final contract. It records that the parties have reached a preliminary understanding on price, structure, and timeline, and it sets the ground rules for the due diligence and formal drafting that follow. Most of the document is non-binding by design, but specific provisions inside it almost always are, and careless wording can turn the whole thing into an enforceable contract whether the parties meant that or not.
What a Letter of Intent Actually Does
The document shows up most often in business acquisitions and commercial real estate, but it also appears in executive hiring, joint ventures, and other transactions where the parties want to signal serious intent without yet being locked in. Signing an LOI typically marks the start of the due diligence phase. The buyer or investor begins reviewing financial statements, tax records, contracts, and pending litigation, while the lawyers start drafting the definitive agreement that will actually govern the deal.
In practice, an LOI serves two purposes at once. It gives the buyer enough comfort to spend real money on inspections, legal review, and financing work. And it gives the seller enough structure to stop entertaining other offers and commit the organization’s time to one transaction.
Binding vs. Non-Binding Provisions
Most LOIs are designed to be non-binding overall, meaning neither side is legally obligated to close the deal. The document usually says so expressly. One SEC-filed example states that “this LOI is not a binding agreement, except as specifically set forth” in a designated section, and that it is “subject to the execution and closing of a definitive agreement.”1U.S. Securities and Exchange Commission. Non-Binding Letter of Intent
The important exception is that certain provisions are carved out and made enforceable even when the rest of the document is not. The usual binding carve-outs are:
- Confidentiality. Both sides agree to keep shared financial data, trade secrets, and deal terms private. The same SEC-filed LOI requires each party to “keep the existence of this LOI and its contents confidential” and limits the use of shared information to “performing due diligence for the Acquisition.”1U.S. Securities and Exchange Commission. Non-Binding Letter of Intent
- Exclusivity. The seller agrees not to solicit or accept competing offers for a defined window.
- Non-solicitation. Neither party will recruit the other’s employees or customers while negotiations are underway.
- Governing law. The parties agree which jurisdiction’s laws apply to disputes over the LOI itself.
Breaking one of these carve-outs can trigger a lawsuit for damages, even when the rest of the document creates no obligation to complete the transaction. For that reason, the binding and non-binding sections should sit under separate headings so there is no ambiguity about which terms are enforceable.
How an LOI Can Become Accidentally Binding
This is where most LOI problems originate. Courts can treat an LOI as a binding contract even when neither party intended it that way. The best-known example is the 1985 Texaco v. Pennzoil case, in which a jury found that an “agreement in principle” for the sale of Getty Oil was binding and awarded Pennzoil $7.53 billion in compensatory damages plus $3 billion in punitive damages against Texaco for interfering with the deal.
Courts generally weigh four factors when deciding whether a preliminary agreement is binding:
- Express reservation. Did the document explicitly state that neither party is bound until a formal agreement is signed? The absence of this language strongly favors a finding that the LOI is a binding contract.
- Partial performance. Did either party begin performing under the agreement’s terms, and did the other side accept that performance?
- Essential terms. Were all material terms agreed upon? If the LOI covers price, structure, timeline, and contingencies with specificity, courts are more likely to treat it as a final agreement.
- Complexity of the transaction. Would a deal of this size normally require a formal written contract? Highly complex transactions are more likely to need a definitive agreement, which can cut against binding intent.
Language choices matter just as much. Words like “shall” and “will” read as binding obligations. Provisions that only make sense in a binding context, such as liquidated damages clauses, amendment procedures, or termination rights, can override a general non-binding disclaimer sitting elsewhere in the document. If you want an LOI to remain non-binding, say so explicitly, say it more than once, and avoid language that reads like a final contract.
Terms the Document Should Contain
Every LOI should identify the parties by their full legal names, describe what is being acquired or leased, and state the proposed price or compensation. Beyond those basics, a workable LOI addresses:
- Deal structure. Whether the buyer is paying cash, transferring stock, assuming liabilities, or some combination. In M&A, the LOI should state whether the deal is an asset purchase or a stock purchase, which carries significant tax and liability consequences for both sides.
- Due diligence period. The window during which the buyer reviews financial statements, tax returns, contracts, and litigation history. This typically runs 30 to 90 days, though complex deals can require longer.
- Contingencies. Conditions that must be met before closing, such as securing financing, obtaining regulatory approval, or passing a property inspection. Each contingency should specify what happens if the condition is not met, including whether the buyer can walk away without penalty.
- Deposit or earnest money. The amount of any upfront payment, where it will be held (usually in escrow), and under what circumstances it is refundable.
- Anticipated closing date. A target date that keeps both sides working toward a final agreement within a defined window.
- Confidentiality terms. What information is treated as confidential, how it may be used, and what happens to shared materials if the deal falls apart.
Exclusivity, No-Shop Clauses, and Break-Up Fees
An exclusivity provision, often called a no-shop clause, prevents the seller from marketing the business or property to other buyers for a defined period after signing. Exclusivity periods commonly run 45 to 75 days from acceptance of the LOI. The buyer gets confidence that the money spent on due diligence will not be undercut by a competing offer.
Sellers should negotiate milestones into the exclusivity window to protect themselves. If the buyer has not finished due diligence or delivered a draft purchase agreement by set dates, the seller regains the right to talk to other buyers. Without those milestones, a slow buyer can tie up a business for months while real interest from other parties walks away.
Exclusivity clauses are almost always designated as binding, even in an otherwise non-binding LOI. A buyer whose exclusivity is breached can sue for damages. Courts in several jurisdictions, however, have limited that recovery to out-of-pocket costs like legal fees and due diligence expenses. Lost profits from the deal that never closed are generally not recoverable, because the parties had only agreed to negotiate, not to consummate a sale.
A break-up fee, sometimes called a termination fee, compensates one side if the other walks away. These fees typically range from 1% to 3% of the transaction value, though some reach 5%. Common triggers include the seller choosing a different buyer, opening the opportunity to public bidding after agreeing to deal privately, or breaking off negotiations without valid reason. A reverse break-up fee runs the other direction: the buyer pays if the deal collapses on the buyer’s side, such as when regulatory approval is denied. Spell out the triggering events specifically. Vague language about “failure to close” invites disputes over who caused the breakdown.
The Duty to Negotiate in Good Faith
Even when an LOI is non-binding, signing one can create a legal obligation to negotiate the final agreement in good faith. That does not mean you must accept the other side’s terms or close the deal at any cost. You can reject proposals you find unacceptable, and failed negotiations are not automatically a breach. What you cannot do is deliberately stall, impose unreasonable new conditions designed to sabotage the deal, or walk away for pretextual reasons after the other side has spent significant money in reliance on the LOI.
The damages for breaching this duty can be substantial. Most courts limit recovery to reliance damages, meaning out-of-pocket costs like attorney fees, due diligence expenses, and business planning costs. Some jurisdictions go further and award the full benefit of the bargain, which can include the profit the injured party would have earned had the deal closed. One New York case saw a developer seek $800 million in lost profits after a good-faith breach; the court ultimately limited recovery to the developer’s out-of-pocket costs, but the litigation itself was enormously expensive.
If your LOI uses phrases like “best efforts” to complete the transaction or an obligation to “negotiate in good faith,” treat those words as consequential. They can create an enforceable duty even where the LOI expressly says no binding agreement exists on the deal’s substantive terms.
Expiration and Termination
Every LOI should include a clear expiration mechanism. Without one, the document can linger indefinitely, leaving the parties unsure whether exclusivity, confidentiality, or good-faith obligations still apply. The simplest approach is a time-based expiration: the LOI terminates automatically if a definitive agreement is not signed within a specified number of days.
Event-based triggers work well alongside time limits. The LOI might terminate if financing is denied, if due diligence turns up material problems, or if a required regulatory approval is not obtained by a certain date. The document should also address what happens to binding provisions after termination. Confidentiality obligations typically survive expiration for one to three years, since the sensitive information shared during due diligence does not become less sensitive just because the deal collapsed.
Either party should also be able to terminate the LOI by written notice if the other side materially breaches a binding provision. A clear termination procedure prevents the awkward situation where one side considers the LOI dead while the other believes negotiations are still active.
A Note on the National Letter of Intent
The National Letter of Intent used in college athletics is a different document that happens to share the name. It is a binding agreement administered by the NCAA in which a student-athlete commits to attend a specific school for one academic year in exchange for an athletics scholarship. A student who signs and then enrolls at a different participating school faces the loss of a season of competition and a year-long residency requirement at the new institution. If you are researching LOIs in a business or real estate context, the NLI’s rules do not apply to you.