What Is A Letter Of Intent? Setting Contract Terms (2026)

Purpose and Benefits of a Letter of Intent

What is a letter of intent’s main purpose? An LOI lists the terms of a proposed deal. The parties use it to verify their understanding of the agreement before spending money to perform due diligence and draft a formal contract.

In some cases, the parties will identify terms that don’t match their understanding of the proposed deal. An LOI offers an inexpensive, quick and easy way for the parties to adjust the deal terms.

When to Use a Letter of Intent

What is a letter of intent used for? Letters of intent are often helpful when a deal includes many terms. They may also be used when a deal has terms that were not explicitly discussed.

For example, even with detailed notes, you might forget a term discussed during lengthy contract negotiations. An LOI can ensure that all parties are on the same page.

Conversely, suppose you spoke briefly to a manager who offered you a job but provided few details. An LOI can provide both you and the employer with a clear summary of the terms and conditions before acceptance.

Types of Letters of Intent

Letters of intent are used in many transactions, including:

• You might draft a business purchase letter of intent when buying or selling a business.
• You can draft a job letter of intent when hiring someone.
• You may draft a real estate letter of intent when buying or leasing land or buildings.

Generally, letters of intent are used in complex or high-value deals. However, even simple deals may benefit from a letter of intent, particularly when there may be a delay between the negotiations and the contract, to memorialize the terms.

How to Write a Letter of Intent

What is a letter of intent’s drafting process like? All relevant terms agreed upon during negotiations will go into the LOI. The letter will include the parties’ names and, in many cases, signatures.

Key Characteristics and Legal Considerations

Letters of intent often include several parts. First, the LOI usually describes its terms as non-binding. Non-binding letters of intent are common because the letter’s purpose is to avoid creating civil liability for either party until everyone understands the deal. However, some letters of intent inadvertently become binding as implied contracts if they fail to explicitly state their non-binding nature.

Second, the LOI describes the terms of the prospective contract. The terms should be written clearly. Ambiguous language defeats the letter’s purpose.

Additionally, the LOI will often state how the parties will proceed. It might set out a timeline for completing due diligence and signing a completed contract.

Drafting a Clear Letter of Intent

A clear letter of intent is an essential step in negotiating and writing a binding agreement. The right letter benefits all parties to a contract by ensuring certainty about the terms before formalizing the agreement.