Legal Definitions - letter of commitment

A letter of commitment is a formal written document in which one party expresses a serious intention or promise to provide something—such as funding, a service, or resources—to another party, usually under specific terms and conditions. While it signifies a strong intent to proceed, it often serves as a preliminary agreement rather than a final, legally binding contract, pending the fulfillment of certain requirements or the execution of more detailed agreements. It essentially outlines the key aspects of a future transaction or relationship that the sender is prepared to enter into.

Here are some examples illustrating how a letter of commitment is used:

• Mortgage Approval for a Home Purchase:

  Imagine a couple applying for a mortgage to buy a new home. After reviewing their financial information and credit history, the bank issues a letter of commitment. This document formally states that the bank will lend them a specific amount of money at a particular interest rate, provided they meet certain conditions, such as obtaining an appraisal of the property and securing homeowner's insurance. This letter allows the couple to confidently proceed with their home purchase, knowing they have secured financing, even though the final loan documents haven't been signed yet.

• Venture Capital Investment in a Startup:

  Consider a technology startup that has developed an innovative product and is seeking funding to expand its operations. A venture capital firm, impressed by the startup's business plan and potential, sends a letter of commitment. This letter outlines the firm's intention to invest a certain sum of money in exchange for equity, detailing the proposed valuation, investment stages, and any conditions that must be met before the funds are disbursed, such as completing due diligence or achieving specific development milestones. It signals the VC firm's serious intent to invest, allowing the startup to plan its next steps and negotiate with other potential investors.

• Government Grant for a Research Project:

  A university research team submits a proposal to a government agency for funding a multi-year study on climate change. After a rigorous review process, the agency issues a letter of commitment to the university. This document formally promises to provide a specific grant amount towards the research project, contingent on the university adhering to certain reporting requirements, ethical guidelines, and project milestones. This commitment enables the university to allocate resources, hire researchers, and begin the project with assurance of financial support.