What is a letter of agreement? This type of contract documents a legal agreement between two parties. It puts the terms of the agreement in writing as a means of resolving later disputes that may arise. Oral contracts are sometimes enforceable, but creating a letter of agreement strengthens the legality of the contract in question. A valid letter of agreement is the same as a valid contract.

When To Use a Letter of Agreement

When you need a legal agreement, it's usually easy to find sample templates online for common agreements such as customer contracts, leases, non-compete agreements, and employment agreements. In some cases, you need to document an agreement for which no existing templates apply. This is when a letter of agreement or memorandum of understanding (MOU) comes in handy.

Let's say you are interested in a friend's motorbike, and he tells you about plans to advertise it for sale for $2,000. You offer to buy it from him before he places the ad to the public. He is happy to do so if you commit to purchasing the bike, so you write him a check for $1,000 and promise to come up with the remainder within 30 days. In return, your friend promises to:

  • Wait at least 30 days to post the motorbike for sale
  • Return the check to you if you cannot pay the balance as promised
  • Cash the check only when you deliver the rest of the money and receive the bike

This type of simple agreement can be documented with a letter of agreement. This is a basic type of contract that includes an offer, consideration, and acceptance of the offer. A contract that does not contain these elements, is overly broad, is illegal in the state in question, or a contract of adhesion is not valid.

Creating a Letter of Agreement

The letter of agreement can be a basic agreement on standard letterhead written by either party. Most commonly, the party who is making the offer writes the letter. Doing so also allows you to control the terms of the agreement provided the general understanding is reflected.

You can also use an MOU format, which is structured like a regular contract. You'll state the names of the parties, the date, and contact information. At the end of the document, each party will sign and date the document.

In the body of the letter or MOU, list the main points of the agreement and provide specific, thorough information wherever possible. This should include specific items for sale, space for rent, or services for hire. You can use bullets, numbered paragraphs, or any other preferred format.

Your MOU should be as concise as possible but may include provisions for jurisdiction, attorney fees and costs, amendments, choice of law, waiver of jury trial, assignments, notices, and/or counterparts. You should be able to use boilerplate clauses for most of these items.

When the letter is complete, send it to the other party with instructions to either sign the agreement or return it with requested revisions. You can sign the letter yourself before passing it along. This provides a simple process that also allows for negotiation.

Once all parties sign a letter of agreement, it becomes a binding legal document. You should include a signature block at the end with room for both signatures and dates with the heading "Acknowledged and Agreed." Both parties should keep a final, signed copy for their records. Parties can either sign one at a time or sign together and exchange copies. The latter method allows both parties to have original signed contracts instead of photocopied signatures.

Letter of Agreement and Bankruptcy

Letters of agreement are often used when an unsecured creditor agrees to settle the debt for less than the amount owed. This is a voluntary agreement governed by contract law and is sometimes called a scheme of arrangement. When the debtor is insolvent, a deed of arrangement is used. The purpose of these letters is to prevent bankruptcy.

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