LOI stands for Letter of Intent. It’s a preliminary document that captures the main terms two parties have agreed to so far, before anyone signs a binding contract. Most of what’s inside an LOI is non-binding, but a few provisions carry real legal weight the moment both sides sign.
What a Letter of Intent Does
An LOI sits between the early “we’re interested” conversations and the fully negotiated contract that lawyers will spend weeks drafting. The document forces both parties to get specific about price, timeline, and deal structure before either side spends serious money on due diligence, inspections, or legal fees.
It also signals commitment. A seller who receives a written letter with concrete numbers knows the buyer has moved past casual interest. That credibility matters when the seller needs to pull together financial records, grant access to proprietary systems, or take a property off the market. Without that written commitment, many sellers won’t open their books.
Where You’ll See One
Mergers and Acquisitions
M&A deals are the classic LOI scenario. A buyer submits a letter outlining the proposed purchase price, deal structure, and timeline before either side spends heavily on accountants, appraisals, and legal review. The LOI gives the seller enough confidence in the buyer’s financial capacity to begin sharing sensitive information like tax returns, customer contracts, and employee agreements.
Commercial Real Estate
In commercial real estate, an LOI functions as the starting framework between buyer and seller. It covers the property description, purchase price, earnest money deposit, and the due diligence investigation period. Developers use these letters to show lenders a project is progressing. Sellers use them to gauge whether a buyer is serious enough to justify taking the property off the market while zoning, environmental, and title investigations happen.
Executive Employment
High-level hiring sometimes uses an LOI to detail compensation, equity grants, start dates, and severance before a formal employment contract is finalized. That gives the candidate enough certainty to resign from a current position while the company’s lawyers work through the final agreement.
Grants and Institutional Funding
Academic institutions and nonprofits use a version of the LOI when applying for research grants or major donations. In that context, the letter introduces a proposed project to a funder and ideally leads to an invitation to submit a full proposal. Many private funding sources require an LOI as the first phase of a competition, using it to filter applicants before the detailed review stage.1Institute for Advanced Study. What Is a Letter of Intent/Inquiry and How Do I Write a Great One?
What’s Inside a Typical LOI
Every deal is different, but most letters of intent cover the same core elements. The opening section identifies the parties and describes the transaction in broad terms, including whether it involves an asset purchase, a merger, a lease, or some other arrangement. From there, the document usually works through:
- Price or valuation method, either a specific dollar figure or a formula such as a multiple of annual earnings or a percentage of net asset value.
- Earnest money or deposit, an upfront payment that demonstrates the buyer’s seriousness, often a percentage of the total price.
- Timeline and milestones, with deadlines for inspections, financing, delivery of financial records, and execution of the final contract.
- Due diligence scope, meaning what information each party will provide, when, and in what format.
- Conditions to closing, such as regulatory approval, board consent, or satisfactory inspection results.
- A clear statement identifying which provisions are binding and which are not.
Setting these terms early reduces the odds of a deal collapsing during final contract drafting, because the major sticking points have already been negotiated.
Binding and Non-Binding Parts
This is where LOIs get tricky, and where people get burned. A single LOI almost always contains both binding and non-binding provisions side by side. The business terms (purchase price, deal structure, closing conditions) are typically non-binding. But confidentiality obligations, exclusivity agreements, and expense allocation clauses are usually enforceable from the moment both parties sign.
Exclusivity
An exclusivity clause, sometimes called a no-shop, prevents the seller from negotiating with other buyers for a set period. Thirty to ninety days is typical, with 45 days the most common. This is one of the few LOI provisions courts consistently enforce. If a seller violates it, the buyer can seek a court order stopping the competing deal and recover the money already spent on due diligence.
Confidentiality
Confidentiality provisions protect the sensitive information exchanged during negotiations. In a typical arrangement, both parties agree to keep the LOI’s existence, its contents, and all related discussions strictly confidential. These obligations frequently outlast the LOI itself. A three-year post-termination confidentiality period is common, and the disclosing party can usually demand the return or destruction of all shared materials if negotiations fall apart.2U.S. Securities and Exchange Commission. Letter of Intent
When “Non-Binding” Becomes Binding
Courts look at the actual language of the document and the parties’ behavior, not the title on the first page. If the LOI states that material terms remain unresolved and that neither party is bound until a definitive agreement is signed, courts will generally honor that. But if the document omits that language and contains all the material terms of a deal, a court can find the LOI enforceable even though both sides expected to negotiate a final contract later. Words matter enormously here. “Shall” and “agrees to” sound like obligations. “Intends to” and “proposes” signal ongoing negotiation.
LOI, MOU, and Term Sheet
These three documents serve a similar purpose and are often used interchangeably, but they have distinct personalities in practice.
A Letter of Intent reads like a formal letter from one party to another. It uses plain language, focuses on key business terms, and is typically revised back and forth until both sides are comfortable. LOIs are the standard preliminary document in asset purchases, real estate, and M&A.
A Memorandum of Understanding is written in prose form and reads more like a bilateral agreement than a one-sided letter. MOUs are less common than LOIs and tend to appear in joint ventures, strategic partnerships, and international arrangements. Because they look and feel more like enforceable contracts, there’s a higher risk that a court could treat one as binding if the language isn’t carefully drafted.
A Term Sheet is formatted as an outline with bullet points for each key term. It tends to be more detailed than an LOI and is the standard format for capital funding rounds, loan financing, and complex transactions where the number of terms makes narrative prose unwieldy.
The legal weight of all three depends almost entirely on the language used, not the label on the document. Calling something a “non-binding term sheet” won’t save you if the text reads like a contract.
How an LOI Ends
Most LOIs include a deadline tied to the execution of a final agreement. If the definitive contract isn’t signed by a specified date, either party can terminate the LOI with written notice to the other side. That date is sometimes called the outside date or drop-dead date, and it keeps negotiations from dragging on indefinitely.
When an LOI expires, the non-binding provisions simply lapse. The binding ones, particularly confidentiality, often survive termination for a stated period. An LOI that expires at the end of a 60-day exclusivity window might still impose confidentiality obligations for another two or three years. Parties who assume everything ends when the LOI expires sometimes find themselves in breach of the one clause that was designed to outlive it.
What Breaking a Binding Clause Costs
Violating a binding provision can trigger real financial consequences. A buyer who discovers the seller has been shopping the deal to competitors during an exclusivity period can seek an injunction stopping the competing transaction and recover the money already spent on due diligence. A party that leaks confidential information shared under a binding confidentiality clause faces potential liability for any resulting business losses.
Damages fall into two categories. Reliance damages cover the out-of-pocket costs the non-breaching party incurred under the LOI: legal fees, accounting reviews, and inspection costs. If the breach destroyed a deal that would otherwise have closed, courts can sometimes award the full benefit the injured party expected to receive from the completed transaction. Which remedy applies depends heavily on what the LOI’s language actually says about consequences, which is why the drafting stage matters far more than most people realize.