Lawyer Listings Add, Update, or Remove Listings

Letter of Intent (LOI) and Term Sheet

The preliminary document that sets out the main terms of a deal before the contract is drafted - which parts of it are usually binding, which are not, and how a "non-binding" letter still creates obligations.

Informational only - this is not legal advice. These definitions explain general legal vocabulary in plain English. They are not advice about your situation, reading them creates no attorney-client relationship, and the law differs from state to state and changes over time. For advice you can rely on, speak to a lawyer licensed in your state.

What it means

A letter of intent or term sheet records the principal terms two sides have agreed in a business sale, investment, lease or joint venture - price, structure, timing, the main conditions - before lawyers draft the definitive agreement. Its purpose is to make sure both sides are negotiating the same deal and to give a buyer the assurance it needs before spending on due diligence. Most letters state that they are non-binding as to the deal itself, and that no party is obliged to buy or sell unless and until a definitive agreement is signed.

What people miss is that parts of the same letter are meant to bind and usually do: an exclusivity or no-shop clause preventing the seller from negotiating with others for a period, confidentiality of the information exchanged, allocation of expenses, a break fee, governing law, and sometimes an express duty to negotiate in good faith toward the definitive agreement. Courts enforce those provisions, and in some states a party who walks away from a letter containing a good-faith negotiation clause, for a reason the letter does not allow, can be liable for the benefit of the bargain the other side lost.

Conversely, a letter that is too complete can be found to be the contract itself. Where the parties have agreed all the essential terms and their words and conduct show they intended to be bound, a court can treat "agreement in principle" as agreement, and a party that then sells to someone else has breached it. The labels "non-binding" and "subject to contract" matter, but they are read alongside everything else the parties did.

Where this comes from

Letters of intent are governed by state contract law. The binding effect of an express duty to negotiate in good faith, and the availability of expectation damages for its breach, is set out in SIGA Technologies, Inc. v. PharmAthene, Inc., 67 A.3d 330 (Del. 2013); the risk that a preliminary agreement is itself the contract is illustrated by Texaco, Inc. v. Pennzoil Co., 729 S.W.2d 768 (Tex. App. 1987). Restatement (Second) of Contracts § 27 states that manifestations of assent sufficient to conclude a contract are not prevented from doing so by the fact that the parties also intend to prepare a written memorial.

When people hire a lawyer for this

Have a lawyer read a letter of intent before signing it, not after: the binding clauses are negotiated then, and an exclusivity period given away in a two-page letter can tie up a seller for months. A party that wants the freedom to walk should make sure the letter says exactly which provisions bind and that nothing in it, or in the emails around it, reads as a promise to complete.

Find a lawyer for this in your state

Choose your state. Each link opens the directory page for the city in that state with the most currently published law firms in this practice area; a +n beside the city is how many other cities in the state also have one. The list is generated when this page loads, so a state whose listings have lapsed drops out rather than becoming a dead link.

« All glossary terms

Part of the LawyerLand plain-English legal glossary. Definitions are written from primary sources - statutes and court rules - and each entry states the authority it rests on, or says plainly when the doctrine is state law with no national rule.

If you cannot afford a lawyer, civil legal aid programmes provide free help with many of these problems: civil legal aid programmes by state.

Related free reference tools: statute of limitations for a personal-injury claim, by state, quoted from each state's official text - part of LawyerLand's legal reference tools.