Legal Definitions - letter of intent

A Letter of Intent (LOI) is a written document that outlines the preliminary understanding and key terms between two or more parties who are considering entering into a more formal, legally binding agreement in the future.

It serves as a roadmap or a preliminary framework, expressing a serious intention to proceed with negotiations, but it is generally not intended to be legally binding itself. The primary purpose of an LOI is to establish a common ground, clarify expectations, and demonstrate a commitment to further discussions without creating immediate legal obligations. While typically non-binding regarding the ultimate deal, parties should be careful with the language used, as courts occasionally find that specific clauses within an LOI (such as confidentiality or exclusivity provisions) can be legally enforceable if the intent is clear.

Here are some examples of how a Letter of Intent might be used:

• Business Acquisition: Imagine a large technology company, "Innovate Corp," is interested in acquiring a smaller, innovative startup, "Bright Ideas Inc." Innovate Corp might send Bright Ideas Inc. an LOI. This document would detail the proposed purchase price range, the general structure of the deal (e.g., whether it's a stock purchase or asset purchase), key conditions for due diligence, and a period of exclusivity during which Bright Ideas Inc. agrees not to negotiate with other potential buyers. This LOI demonstrates Innovate Corp's serious interest and sets the stage for detailed negotiations, but it does not legally obligate either company to complete the acquisition until a definitive purchase agreement is signed.

• Commercial Lease Negotiation: A growing restaurant chain, "Gourmet Bites," identifies a prime location in a new shopping center for its next outlet. Before committing to a complex, multi-year lease agreement, Gourmet Bites and the property developer might sign an LOI. This LOI would specify the desired square footage, the proposed rent per square foot, the intended lease term (e.g., 10 years), any tenant improvement allowances the developer might offer, and the target commencement date. This document allows both parties to agree on the fundamental business terms and proceed with more detailed legal and financial reviews without being fully bound to the final lease until all conditions are met and a formal lease is executed.

• Joint Venture or Collaboration: Two pharmaceutical companies, "HealthCo" and "BioLabs," are exploring a joint venture to develop a new drug. They might draft an LOI to outline their initial understanding of the collaboration. This LOI would describe the scope of the research and development project, the proposed roles and responsibilities of each company, how intellectual property rights might be shared, and the general timeline for the project. This preliminary agreement signals their mutual desire to work together and provides a framework for securing internal approvals and resources, allowing them to move forward with detailed planning before drafting a comprehensive, legally binding joint venture agreement.