A Letter of Intent (LOI) is non-binding and serves as a preliminary agreement before signing a binding contract. It is generally used to signal interest in pursuing a deal known to the LOI parties.
With this document, you can discuss the terms of a future agreement or continue to negotiate, all without involving an attorney's services for the informal nature of the LOI.
Suppose you are looking to enter into a business relationship with an individual or a company. In that case, you may want to signal your intention before getting into the nitty-gritty, whether this is because you are incredibly interested or for fear of another company beating you to the punch. With a LOI, you can demonstrate your agreement with specific terms as you continue to negotiate the rest.
As stated before, the LOI is more of a formality rather than a legally binding contract. It is most commonly used to propose purchases, mergers, and acquisitions. As part of the terms, a LOI can contain a price agreed upon in addition to other consensual details of the deal.
It is such a generally useful document. Even students use LOIs to indicate their intention to accept a scholarship or college admission offer.
Depending on your state, a Letter of Intent may also be known as:
Sometimes companies and people are interested in collaborating, but they don't want to sign any agreement yet because they want more negotiating. Perhaps one party would like to purchase another party's estate but isn't sure about current liabilities. In these situations, they decide to sign a Letter of Intent to show good faith and interest in working together. It helps the two to negotiate terms and eventually come up with something that works for both.
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After printing out the LOI, you might want to review and proofread it. After that, get everyone to sign it. Witnesses and notarization are not necessary as the LOI is not designed to be binding.
After signing the LOI, it is customary to distribute a copy to all involved. It does not have to be filed with any governing body.
Companies use LOIS for business negotiation in anticipation of a future agreement. Prior to an official deal, they can take their time affirming to the terms satisfactory to all. There are several types of business LOIS. Most commonly, it is used to signal an intention to purchase a real property, a business, a vehicle, and the like. You can even use a LOI to show interest in working for a particular company. Students can use a Letter of Intent to formally accept a scholarship offer and student-athletes would do the same to show a commitment to accept a sports scholarship offer from a university – where top-ranked high school athletes in the major sports often make the news after signing a LOI.
Although the LOI is not a requirement, it can give both parties confidence that this is a serious deal in the works, where a LOI can be used as a guideline for the agreement that is to happen in the future. In the meantime, you can inspect the LOI for any terms that you might want to change or negotiate before arriving at the definitive agreement. Banks might also demand to see a LOI before authorizing to finance the business deal made.
LOIS do not have to be notarized. Doing so will not add any weight to the document, which is technically not enforceable to begin with, so it could only be a waste of time and money.
As mentioned, LOIs are not legally binding. Any company or person party to the LOI can back out of the deal being negotiated at any time and there is no recourse to all other parties involved. The LOI is simply not designed to be used in this way.
A Letter of Intent is a show of good faith and nothing more than that. It serves as a roadmap leading to the parties involved entering into a formal agreement, assuming that everything goes to plan.
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