A letter of intent (LOI), also called a term sheet, is a preliminary non-binding agreement that lays out the terms for a future binding agreement. In general, it specifies the intentions and expectations of two parties to move forward with a deal. While primarily used in business transactions, a letter of intent has many different uses. Listed below are some of the most popular ways a letter of intent is used.

1. Purchase of Business

When a business intends to purchase another business entity, they use a letter of intent to address all the conditions of the purchase, including assumed liabilities, purchase price and whether they are purchasing assets or shares. It might also cover more specific payment provisions, such as schedule, deposit and financing. Once this letter has been agreed to by both the seller and purchaser, they can proceed with a purchase agreement.

2. Joint Venture

A joint venture deal involves two businesses who remain independent but join forces for a short period of time to accomplish a task, complete a project or process a transaction. Unlike a business purchase, there is no transfer of ownership in a joint venture. The letter of intent for this venture may include confidentiality details, contributions of both companies and many more terms and conditions for this strategic alliance. Once a letter of intent is drafted and understood by both parties, the two entities would sign a joint venture agreement solidifying their arrangement.

3. Purchase of Real Estate

A buyer may draw up a letter of intent to show the seriousness of their intentions to purchase a commercial or residential property. It allows the buyer to test the waters with a seller before implementing a purchase contract, as well as leaves room for negotiation. A letter of intent for a real estate purchase usually covers purchase price and payment plan, inspection period, as well as may include a closing date for accepting the offer.

4. Real Estate Lease

Prior to signing a lease agreement, a tenant and landlord may sign a letter of intent to stipulate rental rates, considerations, rules and responsibilities of the tenancy.

5. Athlete Scholarship

Letters of intent can be used in many levels of sports competition, but its use is especially popular among the National Collegiate Athletic Association (NCAA). They use a letter of intent to specify an athletes agreement to attend a college in exchange for financial assistance. In the annual National Signing Day, many athletes are signed to colleges across the United States. Once a letter of intent has been signed, other academic facilities are prohibited from contacting a student for recruitment. Although the letter assures a full year of financial aid for first time students, it does not guarantee admittance into the college.

6. Last Will and Wishes for Children

A last will and testament specifies how an individual would like their estate divided and who will care for their children after their death. However, in addition to a last will, a parent may also include a letter of intent. This serves to provide further explanation for their decisions made in the will or to list the assets they wish to give away to certain individuals. Although not binding, the letter can be frequently updated without making amendments to the will.

A letter of intent can also be used in conjunction with a will when specifying a parent’s wishes for their child’s future care. It can include who they want for guardians and also the kind of care they want for their children, including spiritual, financial, legal, medical and other special care considerations. This letter is valuable because it serves as a template for a parent’s hopes and dreams for their children, should they no longer be around to see them transpire.

In the event of a parent’s death, the court seeks to make decisions for the best of the family. If a parent has prepared a letter, it is likely their children will have the care they intended.

7. Employment Application

A letter of intent for employment is essentially a cover letter or letter of interest. It states why a candidate is interested in the position and may reference their skills or experience.

8. Financing

Also referred to as a financial letter of intent, this document is used to secure funding, whether it’s a scholarship, loan or grant. It includes how an individual intends to use the money and describes why they need the funding.

9. College/Grad School/University Application

When a student applies for acceptance into university or grad school, they may be asked to write a letter of intent to express their interest in being accepted to a certain program. It is determined from this letter whether a student has appropriate career and academic goals to fit with the program or supervisor.

10. Construction

Binding agreements take time. For this reason, contractors or their clients may use a letter of intent to draw up terms about the services, payment, liability, confidentiality and more to allow the contractor to begin work while the official contractor agreement is being formalized. This push for starting work may be due to deadlines and other reasons.

Unfortunately, there are risks involved with this type of agreement. Because the letter is non-binding, it is suggested a contractor avoids using them or only signs one when a formal agreement immediately follows. If a letter of intent needs to be created, proper caution should be exercised, as well as appropriate formalities during the interim.

Photo: ©iStock/chrisdorney

Posted by Kristy DeSmit

Kristy is a blogger, Twitter enthusiast, and company legalese interpreter.

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