Non Binding Letter of Intent Template Explained

Key Takeaways

• A non binding letter of intent (LOI) outlines proposed deal terms while leaving final obligations open until a definitive contract is signed.
• These letters help structure negotiations, outline expectations, and demonstrate good faith, but they typically include disclaimers clarifying that the agreement is not binding.
• Some provisions—like confidentiality, exclusivity, or governing law—can still be legally enforceable even in a non binding LOI.
• Courts may enforce parts of a non binding letter of intent if the language, conduct of the parties, or inclusion of key terms suggests intent to be bound.
• A carefully drafted LOI can prevent misunderstandings, preserve negotiating flexibility, and protect both parties from unintended legal consequences.

A non-binding letter of intent template provides the framework for preparing a legal document the describes a potential agreement about the terms of a transaction or purchase that may occur between two parties. The parties involved can agree to specific terms while making an agreement to keep negotiating on the other transaction details and terms before signing the purchase agreement.

The Letter of Intent Is Used in Drafting the Final Contract

The letter of intent (LOI) establishes the boundaries of a workable deal so the involved parties can move ahead with writing up a contract draft. Sometimes, the parties are able to move directly into the due diligence phase of completing the transaction. A letter of intent is almost like a map that shows how negotiations are expected to move forward between the involved parties while the deal is completed.

Binding vs. Non Binding Provisions

A non binding letter of intent typically makes clear which provisions are binding and which are not. Binding provisions often include:

• Confidentiality agreements that protect sensitive information exchanged during negotiations.
• Exclusivity clauses preventing one party from negotiating with competitors for a set period.
• Governing law and dispute resolution terms that determine jurisdiction if conflicts arise.

Other deal terms—such as purchase price, financing conditions, and timing of closing—are usually expressly stated as non binding. Including explicit language like “this letter does not create a binding obligation” helps avoid accidental enforcement.

Other Names for a Letter of Intent

There are several other names that are commonly used to describe a letter of intent:

• Assurance letter
• Framework letter
• Intent to purchase letter
• Letter of Interest
• LOI
• Memorandum of understanding
• MOU
• Term sheet

Why Parties Use a Letter of Intent

The most common use of a letter of intent is to establish the parameters of a purchase. These documents can be legally binding in some situations, but they can also be viewed as non-binding agreements between the involved parties. For example, a LOI might be non-binding when the parties involved are certain they want to complete a deal, but they aren't quite ready to commit to the terms of the deal.

Risks of Unintended Enforcement

Although called a non binding letter of intent, courts have sometimes treated these documents as partially or fully enforceable. Factors that increase the risk include:

• Use of definitive contract language like “shall” or “agree”.
• Inclusion of material terms such as price, payment structure, or duration.
• Evidence that both parties acted as if the agreement was final.
• Failure to include clear disclaimers specifying non binding intent.

This makes it essential to draft LOIs carefully. Even where parties intend a document to be preliminary, courts may enforce it if they believe a “meeting of the minds” occurred.

Intent to Purchase Letters When Buying a Business

Two parties starting the process of buying a business that's for sale have the option to use an LOI if they agree on a price but are still negotiating which party is liable for each part of the transaction.

• A signed LOI shows good faith intention to work out a deal on the part of each involved party.
• These documents help both parties understand what the other party expects as the purchase moves forward.
• Preparing an LOI helps make sure opportunities are not missed during the transaction.
• Loan agencies and banks often require proof there is a deal in place before committing to financing.
• An LOI provides the opportunity for each party to ask questions about the other party's commitment to sealing the deal.
• A non-binding letter of intent leaves the opportunity to walk away from the deal if terms can't be agreed upon.

Common Elements of a Non Binding Letter of Intent

Most LOIs share certain standard elements, including:

1. Identification of parties – the buyer, seller, or other involved entities.
2. Transaction structure – whether it is an asset purchase, stock purchase, or merger.
3. Proposed purchase price or valuation method.
4. Due diligence timeline and access to records.
5. Exclusivity or “no-shop” terms if agreed upon.
6. Conditions precedent such as financing, regulatory approval, or board consent.
7. Statement of non binding nature except for specified binding provisions.

These elements allow the parties to move forward with confidence while retaining flexibility to adjust terms before finalizing the contract.

Awareness of the Parties Involved

Even a well-prepared non-binding LOI can be enforceable if the parties negotiating don't understand the potential results of their behavior. While this type of document is almost always meant to be non-binding, it's common to include some binding provisions related to confidentiality, marketing techniques, or exclusivity in negotiations. A disclaimer is included in most letters of intent stating that the involved parties are not bound by the terms of the LOI until after another document, a binding agreement, is fully negotiated and signed by the involved parties.

Covenant of Good Faith in Contracts

While a covenant of good faith is part of every contract, a non-binding letter of intent does not include this implied covenant.

• The absence of a covenant of good faith, however, doesn't mean the negotiating parties are free of obligations.
• An agreement to agree isn't definite enough to be enforceable, but most jurisdictions do recognize the validity of the agreement to negotiate as enforce.
• The involved parties must negotiate in good faith within a reasonable time period.

Also, some courts have upheld letters of intent as proof the parties reached a meeting of the minds which made the LOI's term enforceable as a contract, followed by an award of damages. This has occurred even though one involved party believed the document was non-binding.

Expressing a non-binding provision in a letter of intent, and precisely listing the things that must happen before it can become a binding agreement, is an absolute requirement in order to avoid the risk of making an unintentional verbal agreement that may be upheld by the court. The non-binding letter of intent may be expressed through a formal type of execution, by an approval from the board of directors, or from a designated third party.

Best Practices for Drafting a Non Binding LOI

When drafting a non binding letter of intent, parties should:

• Use clear disclaimers that expressly state which sections are binding and which are not.
• Avoid overly specific contract language in non binding sections to prevent accidental enforceability.
• Limit binding terms to essentials like confidentiality or exclusivity.
• Consult legal counsel to ensure the LOI reflects the parties’ true intent and complies with jurisdictional rules.

By following these practices, businesses can reap the benefits of structuring negotiations without unintentionally creating a binding contract.

Frequently Asked Questions

1. What makes a non binding letter of intent enforceable?
   Courts may enforce an LOI if it contains definitive language, key deal terms, or if parties behave as though it were final.
2. Which provisions in a non binding LOI are usually binding?
   Confidentiality, exclusivity, governing law, and dispute resolution terms are often binding, even if the rest of the LOI is not.
3. Why use a non binding letter of intent instead of going straight to a contract?
   An LOI helps organize negotiations, outline expectations, and satisfy lenders or investors before the parties commit to a final contract.
4. How can parties reduce the risk of unintended enforcement?
   Include disclaimers, avoid definitive contract language, and clearly identify which sections are binding.
5. Can a non binding LOI include financial terms like purchase price?
   Yes. Financial terms can be included, but they should be expressly stated as preliminary and non binding unless both parties intend otherwise.

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