What a Letter of Intent Is and How to Use One (2026)

A letter of intent, or LOI, is a document that records the main terms two parties intend to agree before they sign a full contract. It is common in acquisitions, large commercial deals, property transactions and partnerships, where the parties want to confirm they are aligned on the big points before spending money on detailed drafting and diligence. The central thing to understand about an LOI is that most of it is not meant to bind, but some of it usually is, and the line between the two is where disputes start. This guide explains what an LOI is, when to use one, what binds and what does not, the key terms, and a working skeleton. It is general information, not legal advice; local law varies. ## What a letter of intent is An LOI sets out the shape of a deal: who the parties are, what is being bought or agreed, the headline price or value, and the main conditions, together with a plan and timetable to get to a signed contract. It goes by several names depending on context and country, including heads of terms, memorandum of understanding (MOU), and term sheet. The names are often used interchangeably, though a term sheet is usually a bullet-point list of commercial terms while an LOI is written as a letter. Whatever it is called, its job is the same: to capture agreement on the essentials and create momentum, before the parties commit to the cost and detail of a full contract. ## When to use one Use an LOI when a deal is big or complex enough that both sides want confidence before investing in it. Typical situations include buying or selling a business, a significant supply or partnership arrangement, commercial property deals, and joint ventures. An LOI is useful when you need to: confirm you and the other side agree on the headline terms; give a board or investors something concrete to approve; justify the cost of diligence and legal drafting; and sometimes secure a period of exclusivity so the other side stops talking to competitors while you do the work. For a simple, low-value deal, an LOI usually adds delay without adding value; go straight to the contract. ## What binds and what does not This is the heart of the LOI. Most of an LOI is expressed as non-binding: the commercial terms are a statement of current intention, not a promise to proceed, so either side can walk away if the full contract is not agreed. But an LOI almost always contains some binding provisions, and these are deliberately carved out as binding even though the rest is not. Commonly binding parts include: - Confidentiality: the parties must keep the discussions and shared information private.

• Exclusivity (or lock-out): one or both agree not to negotiate with others for a set period.
• Costs: each side bears its own costs, or a break fee applies if one walks away.
• Governing law and disputes: which law applies to the LOI itself.
• Standstill or conduct: sometimes, how the business is run during the period. The risk is ambiguity. If the document is unclear about which parts bind, a court may have to decide, and in some jurisdictions a detailed LOI with signs of commitment can create a binding contract even where the parties thought it would not. The safe practice is to state expressly, in plain words, that the LOI is not binding except for the named clauses, and to say which those are. Do not rely on the title alone; what matters is the substance and the stated intention. ## Key terms to include A well-drafted LOI usually covers: - The parties and the structure of the proposed deal.
• The subject: what is being bought, sold or agreed.
• Price or value, and how it is calculated or paid.
• Key conditions: what must happen before signing (diligence, approvals, financing, consents).
• Exclusivity period, if any.
• Confidentiality.
• Timetable and the steps to a signed contract.
• Costs and any break fee.
• The binding and non-binding statement making clear what is intended to bind.
• Governing law. ## An illustrative skeleton 1. Date and parties

2. Purpose and background
3. The proposed transaction (what is being agreed)
4. Price or value and payment outline
5. Key conditions to a full agreement
6. Due diligence access
7. Exclusivity period (binding)
8. Confidentiality (binding)
9. Costs and any break fee (binding)
10. Timetable and next steps
11. Binding and non-binding statement
12. Governing law and jurisdiction (binding)
13. Signatures Give the most care to the binding and non-binding statement and to exclusivity and confidentiality, because those are the parts that actually have teeth. ## Common mistakes - Leaving binding status unclear, so no one knows what is actually committed.

• Making the LOI so detailed it reads like the contract, which risks being treated as binding.
• Agreeing exclusivity without a clear end date, locking yourself out of alternatives.
• Treating the LOI as the end of negotiation rather than the start of drafting; the real terms are settled in the full contract.
• Skipping legal review on a high-value deal because it is just a letter. ## Managing the step from LOI to contract The LOI is the start of a process, and the hard part is carrying its agreed terms cleanly into the full contract and tracking the conditions, exclusivity dates and diligence tasks it sets. This is where a contract workspace helps. Adira can draft from a brief into a structured clause tree, track the key dates and obligations an LOI creates (exclusivity expiry, conditions, timetable) on a live timeline, and keep the versions straight as the deal moves from letter to contract. It is one AI workspace tuned to your company and built on Claude; see Adira. The explanation above stands on its own. ## Bottom line A letter of intent records the main terms two parties intend to agree before the full contract, to confirm alignment and create momentum on a significant deal. Most of it is non-binding, but confidentiality, exclusivity, costs and governing law usually are, so state expressly which parts bind. Keep it shorter than the contract, pin down exclusivity and confidentiality, and get legal review when the stakes are high. The deal is still settled in the full agreement; the LOI just gets you there with less wasted effort.