Letters of Intent – Deal makers or Deal breakers?
Most transactions which I handle start with a Letter of Intent (LOI). An LOI is a document that outlines the main points of a proposed deal before a formal, contract is written and signed. LOI’s usually include such points as the price, down payment, financing terms, contingencies and expected settlement date. LOI’s are used to signal serious intent of the parties without binding the parties to a final deal. But almost all most of the LOI’s which I read and write have some binding provisions such as price and confidentiality. Read your LOI carefully to see what provisions are binding and nob binding.
LOI’s can save time and money. Comprehensive business contracts can be 10, 20 or even 80 pages long especially when it comes to commercial leases. It’s not worth the time and effort to write a very long and detailed contract if a you are still in negotiations. That’s where LOI’s come in.
LOI’s might be thought of as informal, but just because they might be informal does not mean that they should be taken lightly. If your LOI states a clear offer, a clear acceptance, specifies a price, and implies an intent to be bound, a judge or jury might conclude that the LOI is a binding contract, even if the LOI says “this is non-binding”.
Avoiding problems with LOI’s
1. Be Explicit: Clearly and repeatedly state which parts are binding and which are non-binding.
2. Avoid Ambiguity: Don’t include language that sounds like you’re making firm commitments if you’re not ready to be bound.
3. Consult Legal Counsel: Always, always, always have a lawyer review any LOI before you sign it.
Conclusion – LOI’s are effective tools but proceed with caution
Ultimately, a Letter of Intent can be seen as a powerful, double-edged sword. It’s a foundational tool that can pave the way for a smooth transaction by establishing clear intent and ground rules. However, the cautionary tale of Pennzoil v. Texaco’s $10.5 billion verdict is a stark reminder: ambiguity is your greatest adversary. Use an LOI to build consensus, but treat its drafting with the same attention to detail as a final contract to protect your interests and avoid a costly, drawn-out legal battle.
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