A letter of intent or LOI is a document detailing an agreement reached between two or more parties. Also called letter a letter of interest or memorandum of understanding, it is used for different purposes such as for business, school admissions, exchange of services, scholarship grants and other agreements. This is usually executed before the parties involved finalize the agreement that can range from share purchase agreements, asset purchase and joint venture among others.
As its name suggests, a person writes this letter to express his intentions in a clear and detailed manner. Other objectives include to clarify certain points in a transaction and to officially announce the negotiations currently going on between parties such as in the case of a joint venture proposal.
If you’re faced with the situation that requires you to sign a letter of intent, it would be worth considering every aspect of the deal you’re involved with. Keep in mind that although this may serve as a temporary contract, the letter of intent is not binding all the time. There is still a chance for the parties involved to back out until the final contract has been made and signed. In some cases when the letter is considered binding, penalties and other legal actions may be implemented against a party who decides to withdraw from the deal.
Make sure that the letter of intent is drafted well spelling out the proper terms and conditions. When this is ensured, it would benefit both parties to read carefully the letter so that they understand the commitment they’re getting into and issues along the way.