A letter of intent is binding in part and non-binding in part. The core commercial terms of the proposed deal — purchase price, structure, closing — are typically non-binding, meaning either side can walk away from them until a definitive agreement is signed. But most LOIs also carve out a handful of provisions that are fully enforceable the moment both parties sign: confidentiality, exclusivity, expense allocation, and the choice of governing law. Whether a letter of intent is binding or non-binding on any given clause depends almost entirely on how the document itself labels that clause.
People get into trouble when they treat the whole document as a handshake. It isn’t. The non-binding parts are genuinely non-binding, and courts have consistently honored LOI language that says material terms remain unresolved and no one is committed until the definitive agreement is signed. The binding parts, though, carry real legal teeth from the moment of signature.
What Is Not Binding
The commercial heart of the deal is the part that stays open. That includes the proposed purchase price or valuation range, the deal structure (asset purchase versus stock purchase), the earnest money and escrow arrangements, non-compete terms, the anticipated closing date, and the various conditions to closing like due diligence, financing, board approval, and third-party consents.
None of those terms obligates either party to actually close. If due diligence turns up problems, if financing falls through, if the board balks, or if either side simply changes its mind on price, the LOI by itself does not force the transaction forward. Those terms become enforceable only when they are carried into a signed definitive agreement.
This is the point most sellers and buyers misunderstand when they sign. An LOI’s purchase price is a proposal, not a promise.
What Is Binding
A short list of provisions is routinely carved out as enforceable. If you sign an LOI containing these, you are legally on the hook for them even if the deal never closes.
Confidentiality. Both sides agree not to disclose proprietary financial data, trade secrets, or the existence of the deal itself. Breach can produce injunctions and damages, and the sensitivity of the information drives how large those damages get.
Exclusivity, often called a no-shop clause. The seller agrees not to solicit or entertain competing offers for a set period. In private acquisitions this window typically runs 30 to 90 days, with 45 days being the common starting point for mid-market deals. Shopping the deal to other buyers during that period is a breach of contract even if the original transaction falls apart.
Expense allocation. A clause specifying who pays for what if the deal collapses. The standard approach is that each party bears its own legal fees, accounting work, and due diligence costs. Without this clause, you fall back on general law, which usually produces the same answer but less cleanly.
Governing law and dispute resolution. Which state’s law controls, and whether disputes go to court or arbitration. This provision binds immediately because you need to know where to litigate about the other binding provisions.
Some LOIs also include a binding commitment to good faith negotiation, and some include a breakup fee. Both are discussed below.
How to Tell Which Is Which in Your Document
If your LOI does not clearly identify which provisions bind and which do not, you are inviting a fight. The clean drafting approach is a single sentence near the top stating that the LOI is non-binding except for specifically identified sections, followed by an explicit “binding” label on each section that is meant to be enforceable.
Read your own LOI with that in mind. Look for an overarching statement about non-binding effect. Then look at the confidentiality, exclusivity, expenses, and governing law sections and check whether each is explicitly tagged as binding. If the document is silent or ambiguous, assume a dispute later will come down to how a court reads the whole document, and fix the ambiguity now rather than litigating it later.
Good Faith Negotiation Is Not Automatic
A widespread assumption is that signing an LOI creates a legal duty to negotiate in good faith toward a definitive agreement. The reality is narrower. The Uniform Commercial Code imposes a good faith obligation on the performance and enforcement of existing contracts, not on pre-contractual negotiations.1Legal Information Institute. Uniform Commercial Code 1-304 – Obligation of Good Faith An LOI that has not ripened into a definitive agreement does not automatically fall under that rule.
Courts in many jurisdictions have, however, enforced good faith negotiation duties that the parties wrote into the LOI themselves. Language such as “the parties agree to negotiate in good faith toward a definitive agreement” can become enforceable. You cannot then walk away arbitrarily or use deceptive tactics. The obligation comes from what the document says, not from a background rule. If your LOI contains that phrase, treat it as binding. If it does not, do not assume the duty exists.
Breakup Fees and What Happens If the Deal Dies
Breakup fees, also called termination fees, compensate one party when the other kills the deal for reasons within their control. They are more common in larger transactions but appear in mid-market deals as well. The average termination fee runs around 3% of deal value. Courts have flagged fees significantly above that level as potentially problematic because they can discourage competing bids and interfere with a seller’s duty to get the best price for shareholders.
When present, a breakup fee is binding. It functions as a forcing mechanism. A buyer who has spent heavily on legal, accounting, and due diligence work wants assurance the seller will not take a late offer from a competitor. A seller may insist on a reverse breakup fee to protect against a buyer who ties the company up for months and then walks away when financing collapses.
If your LOI does not address what happens financially when a deal falls apart, the default is that each side eats its own costs. That default can leave the party who invested more in the process with no recourse, which is why expense and breakup provisions deserve attention before signing rather than after a deal starts to wobble.
When the LOI Expires
Almost every well-drafted LOI contains an expiration date, and that date matters for the binding provisions too. Once the LOI lapses, all of its obligations end, including confidentiality and exclusivity. If you want those protections to continue past the stated date, you need a written extension or a separate standalone confidentiality agreement that survives on its own terms.
Letting an LOI expire without either extending it or signing a definitive agreement is one of the most common ways deals quietly die. From the moment of signature, the exclusivity clock is running, the confidentiality obligations are live, and the parties are in due diligence. The binding provisions do their work during that window and then stop. Treat the expiration date as a real deadline, not a formality.
The Practical Takeaway
Before you sign a letter of intent, read it with one question in front of you: which specific clauses can be enforced against me starting today, and which only become enforceable if we sign a definitive agreement later? If the document does not answer that question clearly on its face, do not sign it. Fix the labels first. The hybrid structure of an LOI is a feature when it is drafted precisely and a trap when it is not.