It might be difficult to draught a letter of intent since, while it can have legal repercussions, the letter is not necessarily considered to be a legally binding document. We’ll assist you in determining whether or not you require a letter of intent. As a bonus, if you do, we’ll take you step-by-step through a conventional letter of intent, explaining each component as we go and pointing out any potential legal pitfalls. We’ll also give you a free letter of intent template that you can download and use as a starting point.
What Is a Letter of Intent?
A letter of intent is a type of “pre-agreement” that takes place before the execution of a legally binding contract. It describes in clear and succinct terms the type of connection that will be established between the individuals involved, as well as what can be fairly expected from both sides. Letters of intent can have varying degrees of legal significance depending on how they are written, thus it is critical to pay particular attention to the letter’s formatting and wording.
There are dozens of different letter of intent templates floating around out there, but they all have a somewhat different definition of what constitutes a “letter of intent.” Many of those templates are simply cover letters for resumes or college applications, and they are available for free online. However, what we’re discussing here is the legal application of the phrase, which is typically used in connection with real estate transactions, acquisitions, and other business or legal agreements.
When Do You Need a Letter of Intent?
To convey to potential buyers and sellers that you are moving into the negotiation phase for acquisitions, mergers, or any big purchase of real estate or other tangible assets, you must first get a letter of intent.
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If any of the following apply, you will require a letter of intent:
You’re involved in a merger or acquisition of some sort.
You want to get finance for a business endeavor or a purchase, but you need some type of good-faith agreement from a bank or financier that the transaction is legitimate before you can proceed.
If the following conditions are met, you do not require a letter of intent:
You’re negotiating with several different parties; a letter of intent normally means that you’re going forward with the parties who have already agreed to work with you and do not allow you to shop around.
You’re concerned that there’s a leak. If your transaction is exceedingly private, a letter of intent can serve as yet another entry point for information to leak.
Once you’ve determined that you require a letter of intent, the next step is to draft one.
How to Write a Letter of Intent
Your attention is required at every step in creating a letter of intent (or in following the instructions in a letter of the intent template). A blunder may result in legal consequences. We’ll walk you through each section, beginning with the address and introduction and concluding with the final signature.
Your Letter of Intent should be addressed correctly.
Addressing your letter in a clear, professional manner demonstrates to all parties involved that you are knowledgeable in your field. Even though it appears to be a straightforward matter, failing to adhere to conventional standards may send a message that you did not intend to express.
Section of the Letter of Intent Address
For emphasis, the phrase “Confidential” should be bolded and underlined to highlight the nature of the correspondence. This should be at the top of the list. It will not be legally binding unless you include a confidentiality provision in the body of the letter, but it will assist in informing both parties that the material included inside the letter is confidential from the outset of the correspondence.
Fill in the blanks with your information. This should include the date, your name, your title, your firm, and any other pertinent contact information you may have.
Fill up the blanks with the recipient’s information. Include their full name, title, company, and mailing address in your letter. Check the veracity of this information by double-checking it. Having a second set of eyes evaluate this section of the letter may be a good idea.
Create a straightforward subject line. Keep it short and to the point, explicitly stating the objective of the letter as well as the identities of both parties. Here’s an excellent illustration of the format:
Subject: Letter of Intent to Enter into a RELATIONSHIP with PARTY X and PARTY Y,” the letter reads.
We will now proceed to the body of the letter, beginning with the introduction.
Legal Landmines to Watch for When Writing a Letter of Intent
In the following section of the letter, you will provide a brief overview of yourself and a general understanding of why the letter of intent is being submitted in the first place.
The section about the Intention and Purpose is short.
The following objectives should be achieved by this section:
Both parties must be defined.
Define the basic outlines of the relationship’s foundation.
Only the most basic information about the possible transaction should be provided.
The following stage is to identify any activities or negotiations that must be carried out during the negotiations and before the closing of the Transaction.
Identify the actions that must be taken to go forward.
This section of your letter of intent will begin by explaining the nuts and bolts of what will be required to move forward with the negotiation process. A formal contract can only be outlined if all of the necessary steps are taken by one or both parties, or if the essential contents of the contract are agreed upon.
template for a letter of intent
Outline any action items that need to be completed by both sides. Further negotiations toward the Transaction may be conditioned on certain measures such as due diligence, safety inspections, or title clearing, and these actions should be described in this section.
Make a schedule for yourself. How much time do the people responsible for the actions stated above have to complete them? This section should also describe how any delays or extensions will be dealt with. Please don’t feel obligated to be specific about the time frame; something as simple as “before to the Transaction” will do.
Describe any relevant clauses, stipulations, or considerations that may be applicable.
Finally, in the body of the letter, include any extra-legal clauses that you may require to commence negotiating with the other party(ies). This section of the letter may or may not be required; however, it explains more intricate legal and business matters that should be addressed. This part may or may not be included in a letter of intent for a less formal, less complex, or low-stakes transaction.
Please keep in mind that the more legalese you include in this part, the more legally enforceable the letter of intent will become. Make an informed decision. Please see the links below for sample clauses that you can use as a guide. The following are examples of possible causes:
Clauses of confidentiality are included in contracts.
Clauses governing the ordinary course of business
Clauses relating to the limitation of liability
Compensation terms or price setting for the upcoming transaction are being discussed (if relevant)
Once you have completed this area, we will proceed to the final step, which is signing the letter.
Putting your signature on the Letter of Intent
The signing portion of the letter of intent is, without a doubt, the most important phase of the entire document. All parties involved must sign the final contract to demonstrate their agreement (and obligation) with the terms of the arrangement. It is possible to accomplish this in person, of course, but there are more convenient, faster, and perhaps more secure means of collecting and keeping sensitive signatures and other important papers.
Electronic signatures are preferred over paper documents not only because they are equally legally binding, but also because they require less time to complete than a paper document.
Adding a signature to a PDF or other document using an app or API such as SignEasy sends the document to all of the people involved in the process right away. All parties are also notified (by text or email) when others sign the document, and all parties are given copies of the final, signed letter of intent as soon as it is signed.
SignEasy does not even require the use of a desktop computer by the persons involved; documents can be signed using mobile phones and tablets.
Download Your Free Letter of Intent Template
A letter of intent should contain several warning indicators that should be observed before signing it, as well as some tips to avoid running afoul of the legal system or unintentional gaps and provisions. Read on for more information.
The language is overly convoluted or imprecise. Letters of intent should not be overly descriptive or feature excessive amounts of extraneous information. This may result in unintentional promises that one or both parties may be required to fulfill. If the letter of intent is contested in court, it may also be declared null and void. Known as the contra proferentem rule, it is frequently invoked by courts in contract disputes to determine how confusing wording should be read to disfavor the party who wrote the contract. Clauses of confidentiality are included in the contract. Include a statement in the letter stating what information is private or otherwise privileged, and who has access to that information.
Legally enforceable clauses. Make it clear in the agreement whether or not the letter of purpose is legally enforceable. If there is no indication to the contrary, it is frequently presumed that a letter of intent is legally binding. However, if one or both parties have a history of nonbinding agreements, courts will frequently rule in favor of the nonbinding nature of a letter of intent in the event of a contract dispute.
As part of determining whether or not the letter of intent was legally enforceable, the court may look at how both parties acted after signing the letter, including whether or not one or both parties made an effort to comply with the letter’s conditions.
A letter of intent that is excessively lengthy. One of the most notable cases, which made it to the Supreme Court, established that a memorandum or letter of intent that is unusually long or detailed might be considered a legally binding contract by the court. It ended up being five pages long in the case of Pennzoil v. Texaco, even though the letter of intent was intended to be a simple beginning of negotiations to purchase stock at a set price. The seller sold the shares at a greater price than mentioned in the letter, and to a third party no less, resulting in a lengthy court battle in which it was determined that a five-page memorandum could be considered a contract and the Court upheld the contract’s validity.
Texaco was awarded more than 10 billion dollars for breach of contract, which all began with an unduly lengthy letter of intent from the company’s president.
Get Your Free Letter of Intent Template by clicking here.
Now that you understand how the letter of intent template works and where you need to be most cautious of legal entanglements, you can download our letter of the intent template and get to work creating your letter of intent. We wish you the best of luck with your major transaction.
You can get the free letter of the intent template by clicking here.
We’d also want to remind any readers that we are not attorneys, and that, even though this template and blog were put together with the assistance of professional attorneys, neither document provides legal advice or representative council in any kind whatsoever.