A letter of intent is usually the starting point in any commercial transaction. A letter of intent has the following attributes:

• Although the letter of intent is typically in the form of a letter “agreement,” it is not intended to be a binding legal document. In fact, the only “agreement” portion is as highlighted below that the LOI is not a binding agreement.
• The letter of intent is intended to recite the terms of the proposed transaction which the parties agreed to in principle. It is intended to provide the framework for the preparation of the subsequent definitive documentation which would be a purchase and sale agreement, lease, or other applicable document.
• The parties should be cautious about including language that the parties agree to negotiate “in good faith.” Such language is an invitation to litigate.
• The parties can consider inserting a provision pursuant to which the parties waive any implied covenant of good faith and fair dealing in negotiations. However, clients have difficulty appreciating the intent behind such language, as they may view it as a reservation of the right to act in bad faith in connection with the transaction.

The best practice is to include in a letter of intent a provision which expressly states that it is a non-binding letter of intent only, that either party can withdraw from discussions and negotiations with respect to the proposed transaction and subsequent definitive documentation at any time without recourse by or against either party, and that neither party will be bound to the other unless and until a mutually satisfactory document is executed by all applicable parties. In addition, in order to try to avoid a claim of reliance by the other party, it is recommended that language be included in the letter of intent that neither the letter of intent nor any negotiations, discussions, or other actions by either party pursuant thereto or in connection with any proposed transaction are intended to create (and shall not create) any legally enforceable rights or obligations. This language can create the mechanism to allow the parties to abandon an unsuccessful transaction without triggering any argument of a violation of any implied covenant of good faith or fair dealing.

Finally, although the more detail that is included in the letter of intent the clearer the roadmap that will be provided to the party drafting the applicable document, the parties should avoid becoming bogged down in extensive negotiations on any particular point. The purpose of the letter of intent as highlighted above is to give each party assurance that the parties have reached agreement on the key business and financial terms and on a sufficient number of legal concepts that they have a meeting of the minds and are likely to be able to consummate the subsequent purchase and sale agreement, lease, or other applicable document. Each transaction requires a judgment call as to the appropriate level of detail. Larger transactions generally result in greater detail in the letter of intent.