What Is a Non Binding Letter of Intent Template?
Non binding letter of intent template provides the framework for preparing a legal document the describes a potential agreement about the terms of transaction.3 min read
2. Other Names for a Letter of Intent
3. Why Parties Use a Letter of Intent
4. Intent to Purchase Letters When Buying a Business
5. Awareness of the Parties Involved
6. Covenant of Good Faith in Contracts
Updated October 28, 2020:
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.
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
- Memorandum of understanding
- 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.
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.
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.
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