WHAT IS A LETTER OF INTENT?
A letter of intent is a writing in which the parties to a proposed transaction state a mutual interest in or commitment to one or more important terms of an agreement and, in most cases, show a mutual intention to prepare a more definitive contract to embody the complete agreement.
A letter of intent may take a variety of forms, e.g., a commitment letter, a memorandum of agreement, or an agreement in principle. The document may be a formal writing or an informal letter. The letter of intent may be legally binding in whole or in part, or it may be legally nonbinding. In real estate sales transactions, letters of intent are usually intended to be nonbinding.
The distinguishing characteristic of a letter of intent is that it does not and is not intended to contain all the terms and conditions contemplated by the parties to be part of a final complete contract for the deal. Rather, it is intended to contain only the important business and financial terms.
Although the parties may not intend the business terms contained in a letter of intent to be binding, by using a written letter of intent the parties may implicitly agree to negotiate in good faith. By failing to negotiate in good faith a party may be subject to reliance damages suffered by the other party. . The parties may specifically provide in the letter of intent that there is no obligation to negotiate in good faith, but such a provision may have a chilling effect on the continuing negotiations.
One benefit of drafting a letter of intent is its ability to serve as a defense to a later claim that an agreement was a “contract of adhesion.” For example, in situations in which a party alleges that it is in an inferior bargaining position and therefore had no choice but to adhere to the contract provisions, courts may look to, among other things, whether the parties executed a letter of intent as evidence that the terms were negotiated. See Grand Prospect Partners, L.P. v Ross Dress for Less, Inc. (2015) 232 CA4th 1332 (involving commercial lease).
The trend is to start calling letters of intent, letters of interest, instead, in order to avoid the argument that the LOI is binding in any way or was intended to be a contract of some type.