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What is a Letter of Intent to Purchase?
A letter of intent to purchase is a written document detailing a buyer’s intent to purchase a seller’s product, assets, or services. It’s used to establish and indicate an understanding between two or more parties which provides the basis for a future or proposed agreement.
Negotiations don't need to be completed for you to draft a letter of intent to purchase. It’s an agreement to agree between a prospective buyer and a seller. A letter of intent to purchase precedes the more formal and detailed purchase agreement.
A letter of intent to purchase is also known as an LOI. Some terms used to refer to a letter of intent include:
- Terms sheet
- Framework letter
- Letter of interest
- Intent to purchase letter
- Assurance letter
Benefits of Using a Letter of Intent to Purchase
A letter of intent to purchase allows the parties to focus on the essential terms of the agreement without prematurely negotiating the specific legal terms. Some of the advantages of using a letter of intent to purchase include:
- Provides a clear indication of the timeframe for concluding the negotiations and completing the broader transaction.
- Communicates and documents your preferences.
- Outlines the terms and structure of the deal.
- Identifies key issues or conditions that allow parties to back out of the deal.
- Prevents negotiating parties from engaging with others during the early stages of the negotiation process.
Is a Letter of Intent to Purchase Binding?
Because letters of intent to purchase are not contracts, always sign a legally enforceable agreement before completing work or providing services under the terms outlined in your letter of intent. However, if appropriately drafted, a letter of intent to purchase can ensure certain parts of the agreement are binding – while others are not.
The binding parts of a letter of intent include:
- Terms of non-solicitation : This prevents both parties from targeting each other's employees.
- Confidentiality : This ensures legally enforceable obligations towards privacy for both parties.
- Exclusivity and negotiation : This stops both parties from negotiating with each other for a reasonable period, thus offering an incentive for parties to complete their negotiations promptly.
It’s helpful to include a clear statement that parties do not intend to be bound until a definitive agreement is executed and delivered to minimize the risk of an enforced non-binding agreement.
While a letter of intent to purchase is not legally binding, it helps lay the groundwork for the official legally binding purchase agreement.
Image via Pexels by Andrea Piacquadio
Types of Purchase Letters of Intent
- Letter of Intent to Purchase Real Estate, Business, or General Property : A letter of intent can be used to state your intention to purchase commercial or residential property or a business. The letter should note that it isn't an official purchase agreement. Instead, the terms and conditions of the business deal will be stated in the actual purchase agreement – and must be agreed upon by all parties.
- Letter of Intent for Acquisition of a Business: This letter of intent is similar to when purchasing a business. In this one, however, it should be marked “confidential.” You may want to include the deal's basic terms and a nonbinding statement.
What Should be Included in a Letter of Intent to Purchase?
The letter of intent to purchase should include:
- Information about both the buyer and seller
- The timeline of the purchase
- Purchase price
- Payment method
- Other details
A letter of intent to purchase covers a range of issues in the buy-sell agreement. It should include details about the agreement and a projected date for completing and signing the purchase agreement.
A letter of intent can cover the main obligations of both the buyer and seller and specify who is responsible for producing the first draft of the agreement. Letters of intent can also mention any pre-conditions to signing the contract. This area is broad and may include producing critical documents or exercising due diligence.
How to Write a Letter of Intent to Purchase
Writing a letter of intent to purchase and even a term sheet will require legal expertise. To avoid any costly mistakes, consult with a lawyer to have them review your letter of intent or draft one for your transaction.
If you wish to create your own letter of intent to purchase, here’s how:
- Identify all parties involved. List all owners included in the public record.
- Use any legal business names if you are entering a business purchase agreement. Provide the house address and unit numbers if the property has multiple units.
- Write the price you agree upon.
- Include the deposit, down payment, and loan type.
- State how you intend to pay for the purchase.
- Set deadlines for inspections and seller disclosures.
- List information you need from the seller, like homeowners’ association documents or rental agreements if there are tenants in the home.
- Identify your broker if you are purchasing real estate.
- Set the date on which you want to take possession or ownership.
- Include contingencies.
- Review carefully. Make sure you agree to the terms. To reiterate, it’s always best to have an attorney or legal professional review documents before signing.
- Sign the letter with your personal or business name and include space for the seller to acknowledge your letter of intent and the date of acceptance.
Conditional language is often added, such as “This Letter of Intent shall be non-binding until a more formal purchase agreement is signed.” However, just because this language is used, it doesn’t mean any party can just walk away from the sale. Instead, a contract is still formed.
It’s important to know that numerous contingencies can be placed in a letter of intent that will protect a buyer. Some examples include a review of the seller’s books and records, lining up suitable financing, reviewing and acceptance by the buyer of all lease and purchase agreements, and the ability to obtain adequate and affordable insurance.
Although these are typically non-binding, there have been court cases where intent to purchase agreements have been deemed enforceable.
If you are the seller, you may be precluded from deciding at the last minute not to sign the purchase agreement if the buyer meets all the obligations outlined in the letter of intent.
Never sign a letter of intent until you are sure you are ready to proceed with the transaction.
Due to the risks associated with a letter of intent, some businesses opt to use a term sheet. It is similar to a letter of intent and cost-effective.
When Should I use a Letter of Intent to Purchase?
A letter of intent to purchase can be used when purchasing a product, services, business, assets, real estate, etc. For example, a vendor may write a letter of intent to be a supplier.
You should use a letter of intent when you want to propel a transaction forward. A letter of intent enables the parties to understand what they are getting into before entering a binding buy-sell agreement.
It helps all parties assess risks and rewards before spending too much time and money on an agreement that may not be beneficial. In addition, it shows the seller that a buyer is serious and vice versa.
Parties should generally use a letter of intent when completing a purchase. Still, there is no set rule or criteria to follow to determine if you should for your particular transaction. Instead, consider the advantages of using an intent to purchase and the potential disadvantages.
A letter of intent lawyer or another professional advisor can offer guidance in making this decision.
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