Letter Agreement: When to Use and How to Write One

What is a Letter Agreement?

A letter agreement is a written legal document that is made between two parties who want a simple way to make their discussions of a transaction official. An agreement letter is binding by the law and can technically be written by just about anybody, but whenever possible, it’s smart to have to have an attorney draft or review the letter because they are trained professionals who can make sure there are no major issues with the terms of the agreement.

While some verbal agreements may be upheld in a court of law if a dispute comes about, it is safest to have an arrangement in writing so that more than just unvalidated claims are available. A letter agreement will guarantee that the terms of your transaction or promised services are enforceable.

A letter agreement is no less official than a more thorough contract when looking at it from a legal standpoint, although it may not provide the same level of detail and protection as a more comprehensive contract. The level of formality and detail in an agreement should depend on the complexity and significance of the transaction.

This agreement can be finished by obtaining all signatures by the parties or just by an exchange of two letters which both detail the same agreement and show the parties’ intent to be bound by it.

When To Use a Letter Agreement

A letter agreement should be used when a more complex contract is not needed due to the non-complicated facts regarding your transaction. If there is not a contract template available for what you are agreeing to then an agreement letter may come in handy.

This type of agreement is very simple because you really only need to ensure three things are included: an offer; a consideration; and an acceptance. However, if these elements are not included in the letter agreement, then it is not valid from a legal standpoint and if one party is wronged by the other there will be no way to professionally solve the issue.

Depending on the nature of the agreement, there might be additional requirements for the terms of the contract. For example, a letter agreement for the sale of goods may require a clear identification of the parties and the goods to be sold.

Letters agreements are sometimes used by people who owe debt to avoid going into bankruptcy over payments they cannot make. This gives the people owing money the chance to settle their debt for less than the total amount owed. It is important to note that debt settlement agreements can vary in complexity, and may require something more substantial than a letter agreement.

How To Write a Letter Agreement

Writing a letter agreement might not be as difficult as other contract types but there are still elements that you must include in it if you want it to be considered relevant and valid. See below for steps to take when drafting an agreement letter:

Step 1 - Formatting. Format your document the way a formal letter would appear and use the same font throughout. Put the date in the upper left corner. Beneath the empty space put the company or individual’s name who you are writing to followed by their address and who the letter is intended for.

Step 2 - Topic. Write ‘Re:’ and right after that briefly type in the purpose of your letter highlighting the key points.

Step 3 - Greeting. Greet the individuals or company you are writing to before getting straight into the content.

Step 4 - Body. This is the longest and most important part of the letter agreement and will contain the following essential information:

• A statement that this letter agreement will serve as proof that all involved parties are at a mutual understanding once it is fully signed.
• A detailed explanation regarding what the offer is as well as the intentions of the person or company making it.
• Further terms and conditions of the agreement that involve matters such as how long it will be in place for, the item or service being discussed for a possible agreement, exact price being offered, and the timeframe allowed to pay in full if more than one payment will be made.
• Any laws or regulations that may apply to the transaction.

Step 5 - Signatures. Signatures of all parties should be the final part of a letter agreement and the date each party signed needs to also be written. If one of the parties wants to have additional proof that they both signed the contract, then they can take the additional step of having it notarized.

View a sample letter agreement here to get a look into how it should be written.

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Key Terms to Put into a Letter Agreement

A letter agreement is somewhat similar to a memorandum of understanding (MOU) and therefore an MOU can be referred to when a letter needs to be drafted. Key terms that should be included in either of these agreements to ensure everything of importance is touched on are as follows:

1. Specific Agreement. The exact item that is being sold, property that is being rented out or sold, or service that is being provided must be described in a way that it cannot be confused with something else.
2. Legal Jurisdiction. If a disagreement arises at some point down the line after the agreement has been fully completed, one or more parties are going to want to resolve the problem by legal means. The agreement should include the local, state, and even federal laws that may apply to the sale or service being provided in exchange for something else so that the proper action can be taken promptly.
3. Attorney Fees. As unfortunate as a legal dispute is, it may come to that in some cases so the agreement needs to include a section that expresses who will pay for lawyers if they are needed.
4. Amendments. The agreement should contain a section that clarifies whether changes can be made at any time during or after the sale or service is finalized, and if so under what conditions.
5. Warranties. A section stating that the product or service will be of certain quality or condition will increase the trust of the party who is purchasing something.

Other terms that you may want to add to increase the strength of your letter agreement are assignments, choice of law clause, waiver of jury trial, and counterparts.

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Differences and Similarities Between a Letter Agreement and Other Agreements

Differences

Simply put, a letter agreement is a written letter that details the understanding of all parties involved. The letter is made on letterhead and is often written by the party making the offer so that they can explain the terms and conditions in a favorable way to them, which are expected to be agreed to. The effectiveness of a letter agreement can be confirmed just by adding a statement indicating that if the person receiving the offer signs the document, then the deal is done.

On the other hand, a memorandum of understanding (MOU) is structured more professionally as a standard or more detailed contract would be. The largest difference is that the MOU has formal recitals at the beginning and end of the agreement instead of an informal greeting and closing statement like the letter.

A letter of intent is often brought up when an MOU is searched for even though they are different, but it differs from a letter agreement as well. A letter agreement is legally enforceable, but a letter of intent is not. A letter of intent is commonly seen in merger and acquisition situations and is an important document due to the key terms that are explained in it.

Similarities

Despite their differences, the bodies of a letter agreement and MOU are very similar and should be as clear and detailed as possible so that the goal can be accomplished. They both consist of the names of the parties, details about the sale or service, and signatures. These documents are both usually broad outlines of an agreement opposed to extremely precise contracts.

To read more about the differences between an MOU and letter agreement, visit this article.

Get Help with a Letter Agreement

If you have decided a letter agreement is the right legal document for your situation or if you just want to get more professional information about this type of agreement, feel free to post a project in ContractsCounsel’s marketplace to get free bids from lawyers. All lawyers have been vetted prior to joining.