What a Letter of Intent is and when to use one
A Letter of Intent (LOI) — sometimes called a Memorandum of Understanding (MOU), Heads of Terms, or Term Sheet — is a preliminary written document that sets out the principal terms of a proposed transaction before the parties commit time and money to definitive contracts and due diligence. It is the workhorse document of M&A, commercial real estate, senior employment offers, commercial leases, and venture investments in both the US and UK.
The legal status of an LOI depends entirely on its drafting. A poorly worded LOI can accidentally form a binding contract; a well-drafted one signals serious intent while preserving the freedom to walk away if due diligence reveals problems. Getting the binding/non-binding line right is the single most important drafting decision.
Binding versus non-binding: the critical distinction
UK approach. The leading authority is Walford v Miles [1992] 2 AC 128, in which the House of Lords held that a bare "agreement to negotiate" is unenforceable for lack of certainty and because there is no implied duty of good-faith negotiation in English contract law. The standard protective device is the "Subject to Contract" heading, which the courts read as making clear that no binding agreement exists until execution of the formal documents (RTS Flexible Systems v Molkerei Alois Müller [2010] UKSC 14).
US approach. US courts apply a fact-specific, multi-factor test (the Tribune factors from Teachers Insurance & Annuity Ass'n v Tribune Co., 670 F. Supp. 491 (SDNY 1987)). Courts examine: (i) whether the parties expressly reserved the right not to be bound, (ii) partial performance, (iii) whether all essential terms were agreed, and (iv) the complexity of the transaction. Use clear language: "This Letter of Intent is non-binding except for paragraphs [X, Y, Z], which are intended to be legally binding."
The Statute of Frauds (varies by US state, codified in UK in s. 2 of the Law of Property (Miscellaneous Provisions) Act 1989 for land contracts) requires sales of land and certain other transactions to be in writing and signed. An LOI for real estate, even if labelled non-binding, must be drafted carefully to avoid being treated as a memorandum sufficient to satisfy the statute.
Use cases by transaction type
Mergers & Acquisitions (M&A). The LOI is signed after preliminary discussions and before due diligence. Standard terms: indicative purchase price (often a range), structure (asset vs share deal), deposit or break fee, exclusivity period (typically 30–90 days), confidentiality, due-diligence access, target signing date for the definitive Sale and Purchase Agreement (SPA), and a Material Adverse Change carve-out.
Real Estate. In the US, an LOI precedes the Purchase and Sale Agreement and typically contains the price, closing date, deposit, financing contingency, inspection contingency, and title-clearance contingency. In the UK, the equivalent is "Heads of Terms" — clearly marked "Subject to Contract" so that no binding obligation arises until exchange. Always include a financing condition: "This offer is conditional upon the buyer obtaining mortgage financing on terms reasonably satisfactory to the buyer within [30] days."
Employment offer letter. In the US, almost all private-sector employment is at-will; the offer letter usually states this expressly to avoid creating an implied contract for a fixed term (a risk after Toussaint v Blue Cross, 408 Mich. 579 (1980)). In the UK, the offer letter is the contractual document of choice for the start of employment and must state the terms required by section 1 of the Employment Rights Act 1996: job title, start date, salary, hours, place of work, notice period, and probationary period (typically 3–6 months).
Commercial lease LOI. Sets out the headline terms before lawyers draft the lease: rent, term, break clauses, rent reviews, repairing obligations (full repairing and insuring vs internal repairing), service charge cap, permitted use, alienation provisions, and any contribution to fit-out. In the UK, also state whether the lease is "contracted out" of sections 24–28 of the Landlord and Tenant Act 1954 (no security of tenure).
Investment term sheet. In venture capital, the term sheet sets pre-money valuation, investment amount, share class (typically preferred), liquidation preference, anti-dilution protection, board composition, founder vesting, and information rights. Industry-standard templates are published by the NVCA (US) and the BVCA (UK).
The eight building blocks of a strong LOI
- Identity of the parties — including registered numbers and registered offices for companies.
- Recital of background — short paragraph explaining how the parties got here.
- Description of the transaction — what is being sold, leased, hired, or invested in.
- Principal financial terms — price (or range), payment structure, deposit, escrow.
- Conditions precedent — financing, satisfactory due diligence, board approval, regulatory clearance, third-party consents.
- Exclusivity / lock-out — period during which the seller cannot negotiate with anyone else (in the UK, a true lock-out for a fixed period is enforceable per Pitt v PHH Asset Management [1994] 1 WLR 327; an open-ended lock-out is not).
- Confidentiality — either built in or by a separate NDA.
- Validity period — how long the offer remains open (15–30 days for M&A; 7–14 days for real estate is typical).
The protective wording every LOI should contain
Place at the top, in capitals: "SUBJECT TO CONTRACT — NON-BINDING". Then in the body: "Save for the provisions on confidentiality, exclusivity, costs and governing law (which the parties intend to be legally binding), this Letter of Intent is a non-binding statement of intent only and shall not give rise to any legal obligation between the parties. No binding contract shall arise until execution by both parties of definitive documentation in form and substance satisfactory to each party."
Delivery and signature
Send by email with PDF attachment plus a signed hard copy by tracked mail (Royal Mail Signed For or USPS Certified Mail) for high-value transactions. Counter-signature returned by the recipient is the standard practice. Electronic signatures are valid in both jurisdictions: in the US under the E-SIGN Act (15 USC § 7001) and the Uniform Electronic Transactions Act (adopted in 49 states); in the UK under the Electronic Communications Act 2000 and the eIDAS Regulation as retained post-Brexit.
Mistakes to avoid
- Failing to mark binding versus non-binding sections clearly
- Omitting "Subject to Contract" in UK transactions
- Specifying all essential terms with no escape clause — risks being treated as a binding contract
- No exclusivity in M&A — competitor walks away with the deal
- No validity date — the offer drifts indefinitely
- Confidentiality omitted — strategic information leaks
- For US real estate: no financing or inspection contingency
- For US employment: no at-will language — implied contract risk
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Our AI produces a Letter of Intent tailored to your transaction type (M&A, real estate, employment, commercial lease, investment), with the correct "Subject to Contract" or non-binding language, exclusivity and confidentiality clauses, conditions precedent, validity period, and (where appropriate) at-will or Statute of Frauds carve-outs. PDF ready to send by USPS Certified Mail or Royal Mail Signed For. First letter free, no account required.