---
title: "What is a letter of intent?"
description: "A letter of intent records proposed deal terms before the final contract. Learn which clauses bind, key dates, risks, and how to track an LOI."
canonical: "https://contracko.com/blog/what-is-a-letter-of-intent"
---
# What is a letter of intent?

Source: https://contracko.com/blog/what-is-a-letter-of-intent

[Blog](https://contracko.com/blog)

[What is a letter of intent?](https://contracko.com/blog/what-is-a-letter-of-intent)

# What is a letter of intent?

Lou Van Reemst Oct 12, 2026

Copy for LLM

A letter of intent (LOI) is a short document that records the main terms of a deal the parties still plan to finalize. Picture a regional heating equipment distributor that wants to buy a small parts supplier. The two owners sign a three-page letter of intent: a $2.4 million price, a 45-day due diligence period, and 60 days of exclusivity. Only the exclusivity and confidentiality paragraphs are binding. So the seller cannot shop the business for 60 days, but either side can still walk away from the price. The purchase itself happens only when both sign a definitive purchase agreement.

This guide covers commercial letters of intent under United States contract law, with court examples from New York, Delaware, and Texas. It is general information, not legal advice. State law decides the details, so check the governing law named in your own letter.

You will see the same document under other names. A term sheet usually covers the same ground in bullet form. A memorandum of understanding (MOU) and an "agreement in principle" are close cousins. In British practice, "heads of terms" names a similar document. The label never settles whether the document binds. The wording and the parties' conduct do. You can see a plain definition in our [letter of intent glossary entry](https://contracko.com/glossary/letter-of-intent).

## Letter of intent: purpose and uses

A letter of intent lets two parties agree on the shape of a deal before they spend money on lawyers, audits, and financing. It turns a conversation into a written outline. It also shows lenders, boards, and landlords that a deal is serious.

Most commercial LOIs appear in a few settings:

- Buying or selling a business. The buyer sets out price, structure, and conditions before due diligence starts.
- Commercial real estate. Tenants and landlords use an LOI to agree rent, term, and fit-out before the lease is drafted. Our guide to [real estate contracts](https://contracko.com/blog/what-is-a-real-estate-contract) explains the binding documents that follow.
- Large supply or service deals. A buyer signals volume and pricing before a master agreement or purchase order is signed.
- Joint ventures and partnerships. The parties record who contributes what before forming an entity.

Large US mergers can also trigger federal premerger notification. The Federal Trade Commission (FTC) rules allow that filing once a contract, agreement in principle, or letter of intent to merge or acquire has been executed. The filer must also attest to a good faith intention to complete the transaction [4]. So a signed LOI can start a regulatory clock, even while the deal terms stay open.

The phrase "letter of intent" also has other meanings. Job seekers send letters of intent to employers, and some grant programs ask for one before a full application. Those letters express interest and are not commercial contracts. An employer's job offer is a different document again, which our [offer letter review tool](https://contracko.com/tools/offer-letter-review) helps you check.

### Letter of intent vs. binding purchase contract

The core question for most readers is whether a signed LOI already commits them to buy or sell. The table below summarizes the usual differences. Each row depends on the actual wording, as the case law in the next sections shows.

| Question | Typical letter of intent | Definitive purchase contract |
| --- | --- | --- |
| Main purpose | Records proposed terms and next steps | Transfers the asset or business on final terms |
| Binding effect | Mostly non-binding, with named binding sections | Fully binding once signed |
| Price | Proposed price or price range | Final price and adjustment mechanics |
| Conditions | Due diligence, financing, approvals still open | Conditions to closing spelled out in detail |
| Remedies | Usually limited to the binding sections | Full contract remedies, including damages |
| Length | Often two to five pages | Often dozens of pages plus schedules |

A purchase contract does the heavy lifting: representations, warranties, indemnities, and closing mechanics. An LOI points toward that document. It should not try to replace it.

## Letter of intent: parties

Every LOI names at least two parties: the party proposing the deal and the party receiving it. In a business sale, these are the buyer and the seller, or the target company and its owners. In a lease, they are the prospective tenant and the landlord. In a supply deal, they are the purchaser and the supplier.

Each party has a different job during the LOI period:

- The buyer or tenant runs due diligence, arranges financing, and drafts or reviews the definitive agreement.
- The seller or landlord gives access to records, sites, and people, and honors any exclusivity promise.
- Both parties keep the negotiations confidential when the LOI or a separate non-disclosure agreement requires it.

Check who signs and in what capacity. A company is bound only through someone with authority to act for it. Board approval can matter too. In the Getty Oil dispute, Pennzoil argued that a deal memorandum needed only board approval to bind, not a later signature. The Texas Court of Appeals let the jury's finding of a binding agreement stand [2].

Advisers such as brokers, accountants, and lawyers are not usually parties to the LOI. They work under their own agreements. A buyer's accounting firm, for example, often works under an engagement letter that defines its due diligence scope.

## Letter of intent: key clauses

Most commercial LOIs split into two groups of [clauses](https://contracko.com/glossary/clause). The first group describes the proposed deal and is usually non-binding. The second group creates obligations that apply immediately. A clear LOI says, section by section, which group each clause belongs to.

Usually non-binding clauses

- Transaction description. What is being bought, leased, or supplied, and in what structure.
- Price and payment. The proposed price, deposit, earn-out, or rent, and when it is paid.
- Conditions. Due diligence, financing, board or regulatory approvals, and third-party consents.
- Key terms for the final agreement. Warranties, employment of key staff, or transition support.
- Timeline. A target date to sign the definitive agreement and to close.

Usually binding clauses

- Exclusivity or no-shop. The seller agrees not to negotiate with others for a set period.
- Confidentiality. Both parties keep the terms and shared information private.
- Costs. Each party pays its own advisers unless the LOI says otherwise.
- Governing law and disputes. Which state's law applies to the binding sections.
- Termination of the LOI. When the letter expires and which duties survive.
- Non-binding statement. An express statement that the remaining terms create no obligation to complete the deal.

Contracko's [letter of intent template](https://contracko.com/contract-templates/letter-of-intent) follows this pattern. It makes exclusivity, confidentiality, and governing law binding and treats everything else as a non-binding expression of interest [5].

### The good faith negotiation clause

Many LOIs add a promise to "negotiate in good faith." That promise can carry real weight. Federal courts applying New York law describe two kinds of binding preliminary agreements [1]. The first kind settles every point that needs negotiation and is fully binding. The second kind settles major terms but leaves others open. It commits the parties to negotiate the open issues in good faith, not to close the deal [1].

Delaware takes this obligation seriously. In a 2013 dispute between two biodefense companies, the Delaware Supreme Court looked at an unsigned license term sheet with a "Non Binding Terms" footer on each page. The parties later signed a bridge loan agreement and a merger agreement. If the merger failed, those signed agreements required the parties to negotiate a license in good faith in accordance with the term sheet [1]. The court held that this obligation to negotiate in good faith is enforceable under Delaware law. It also held that a court may award expectation damages when the record shows the parties would have reached agreement but for the defendant's bad faith [1]. The court then sent the damages award back for reconsideration [1].

New York is different on remedies. The same opinion notes that New York's highest court limited a plaintiff to reliance damages for breach of an agreement to negotiate [1]. So a single "good faith" sentence can mean very different exposure depending on the governing law.

## Dates and lifecycle events

An LOI is a short-lived document, but its dates drive the whole deal. Missing one can cost exclusivity, negotiating position, or the deal itself. These are the dates to capture from a signed letter:

| Date | What it controls |
| --- | --- |
| Signing date | When binding sections such as confidentiality start |
| Due diligence end | Last day for the buyer to finish reviews or raise issues |
| Exclusivity expiry | When the seller may talk to other buyers again |
| Target signing date | When the definitive agreement should be signed |
| Outside or expiry date | When the LOI ends if no definitive agreement exists |
| Regulatory filing date | When a premerger or other filing is made, if required |
| Confidentiality end | When surviving secrecy duties expire, if they do |

The [contract lifecycle](https://contracko.com/glossary/contract-lifecycle) of an LOI usually runs in five steps:

1. Draft and negotiate. The parties exchange versions until the main terms are agreed.
2. Sign. Binding sections take effect, and the diligence and exclusivity clocks start.
3. Due diligence. The buyer investigates while both sides draft the definitive agreement.
4. Definitive agreement or expiry. The final contract is signed, or the LOI lapses on its outside date.
5. Supersession. The definitive agreement usually states that it replaces prior understandings, including the LOI. Surviving confidentiality duties may still run.

Watch the exclusivity period most closely. It often ends before diligence does. Extensions are common, but each one should be in writing and stored with the original letter. Contracko's guide to [contract dates](https://contracko.com/docs/contract-dates) shows how end dates and notice periods are tracked in the product.

## Risks and common mistakes

The biggest risk is a gap between what the parties think they signed and what a court later finds. The Getty Oil dispute is the classic US example. In January 1984, Pennzoil and Getty entities worked from a "Memorandum of Agreement" and issued press releases announcing an "agreement in principle" [2]. Texaco then agreed to buy Getty Oil. A Texas jury found that Pennzoil and the Getty entities had intended to be bound. In 1987, the Texas Court of Appeals, applying New York law, upheld $7.53 billion in compensatory damages. It cut punitive damages to $1 billion, conditional on Pennzoil filing a remittitur [2].

That court listed four factors New York courts use to decide whether parties meant to be bound before signing a formal contract [2]:

1. Whether a party expressly reserved the right not to be bound without a signed writing.
2. Whether there was partial performance of the contract.
3. Whether all terms of the alleged contract had been agreed.
4. Whether the agreement is the type usually committed to writing.

Common mistakes follow from those factors:

- No clear non-binding statement. Without one, a detailed LOI can look like a finished deal. State in the letter that no party is bound to the transaction until a definitive agreement is signed.
- Acting as if the deal is done. Paying deposits, shipping goods, or moving staff can count as partial performance under the New York factors [2].
- Treating an LOI like a purchase order. For sales of goods, the model Uniform Commercial Code (UCC) Article 2, as each US state enacts it, says a contract can be formed by conduct. It also says open terms do not defeat a contract if the parties intended one and a court has a reasonably certain basis for a remedy [3]. Under the same model article, a goods contract of $500 or more generally needs a signed writing to be enforceable, subject to listed exceptions [3].
- Loose good faith wording. Under Delaware law, a binding duty to negotiate in good faith can support expectation damages in the circumstances described above [1].
- Letting exclusivity lapse or roll silently. Nobody diarises the expiry, and the seller is free to talk to others before the buyer notices.
- Losing track of binding sections. Confidentiality and cost clauses may survive long after the deal dies.

Treat these as [contract risk management](https://contracko.com/glossary/contract-risk-management) issues, not paperwork. Ask counsel in the governing state to review an LOI before signing when the deal is significant.

## Contract-management checklist

Store the signed LOI the same way you store a signed contract. It has binding sections, deadlines, and a successor document. Use this checklist when you file it.

Capture these fields

- Parties, signatories, and their authority or approvals
- The governing law named in the letter
- A list of binding sections, quoted by section number
- The non-binding statement, quoted in full
- Exclusivity scope and length
- Confidentiality scope and any survival period
- Any linked non-disclosure agreement
- Cost and break-fee terms, if any

Diarise these dates

- Due diligence end date, with a reminder one week before
- Exclusivity expiry, with a reminder before any extension decision
- Target date for the definitive agreement
- Outside or expiry date of the LOI
- Confidentiality end date, if the letter sets one

Review on a cadence

- Weekly during the LOI period: open diligence items and the drafting status of the definitive agreement
- At each extension: confirm it is signed and update every affected date
- At signing of the definitive agreement: link it to the LOI and close or update the LOI's reminders
- If the deal dies: record the termination date and keep the surviving confidentiality obligations active

Contracko can hold an LOI in a central [contract repository](https://contracko.com/features/contract-repository). Amendments and attachments can be linked to their main contract as related documents [6]. Reminders can cover end dates, notice dates, and custom events such as milestones [6]. That lets you track exclusivity and diligence deadlines next to the definitive agreement that follows. When the final deal is signed with [electronic signatures](https://contracko.com/blog/electronic-signature-for-contracts), it can sit in the same record. You can test this on your own documents with a [free trial](https://contracko.com/pricing).

## Sources

[1] Delaware Supreme Court, SIGA Technologies, Inc. v. PharmAthene, Inc., 67 A.3d 330 (Del. 2013) (good faith negotiation duty, binding preliminary agreements, damages). static.case.law/a3d/67/cases/0330-01.json

[2] Texas Court of Appeals, Texaco, Inc. v. Pennzoil, Co., 729 S.W.2d 768 (Tex. App. 1987) (intent to be bound under New York law, damages). static.case.law/sw2d/729/cases/0768-01.json

[3] Uniform Law Commission and American Law Institute, Uniform Commercial Code sections 2-201 and 2-204 (model text via Cornell LII). law.cornell.edu/ucc/2

[4] Federal Trade Commission, 16 CFR 803.5(b) (premerger filing on an executed letter of intent). ecfr.gov/current/title-16/chapter-I/subchapter-H/part-803/section-803.5

[5] Contracko. Letter of intent template (binding and non-binding sections). contracko.com/contract-templates/letter-of-intent

[6] Contracko. Contract AI and expiration reminder feature pages (related documents and custom events). contracko.com/features

Images in this article were generated with the assistance of AI.

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