Conclusion of a letter of intent

In order to reach internal agreement on key terms of the agreement, each transaction party must prepare to sign a letter of intent within their organization. Before signing letters of intent, managers, for example, must obtain approval from senior management and the organization's lawyer. This document can help the parties persuade third parties of their serious intentions and keep other transaction participants informed at various stages.

Characteristics of the letter of intent

A letter of intent is any written document that contains the main terms of the transaction and is signed by the parties or their agents. This type of document is more common in business relationships than in personal legal transactions. For a variety of reasons, a company may want to draft a letter of intent during the early stages of a negotiation.

Organizations are able to:

• express a desire to receive specific information on provisions to be discussed later;
• create a foundation for the execution of the process of drafting a commercial contract;
• to establish deadlines for completing the contract's final version;
• determine the confidentiality terms;
• for a set period of time, prohibit negotiations with third parties;
• reveal the seriousness of the other party's intentions to sign the agreement before the participants spend their resources preparing the transaction's details.

Regardless of the reason, drafting a letter of intent is not a requirement for signing a binding contract. When introducing a letter, the following factors should be considered:

• the desire to strengthen their business relationship by signing such a letter;
• the letter will serve as confirmation that the parties' opinions coincide - this method is used when the transaction's terms are complex;
• the letter will serve as a convincing document to a third party that the transaction is viable for the business; the letter can be used to draft a formal contract

A letter of intent is a low-cost way to outline the key commercial requirements of a transaction and provide favorable terms for reviewing the remaining terms and signing the contract. Before beginning the negotiation process, you can use such a document to identify any aspects of the transaction's violation. It is worth contacting specialized specialists to help you speed up the process and prepare a high-quality document when negotiating an agreement of intent. Our team of specialists is always available to advise you and accompany you through the transaction.

Each transaction party must prepare to sign a letter of intent within their organization, which will allow them to reach internal agreements on key terms of the agreement. Before signing letters of intent, managers, for example, must obtain approval from senior management and the organization's lawyer. This document can help the parties persuade third parties of their serious intentions and avoid confusion for other transaction participants at various stages.

An agreement of intent may obligate the parties to fulfill the transaction's necessary conditions, such as obligations for a full inspection, cost reimbursement, fair negotiation, and more.

Rules for drafting a letter of intent

An agreement of intent can be drafted for a variety of purposes, including:

• contract terms; 
• partnerships; 
• leasing; 
• purchase and sale of goods and real estate.

The following items are required for writing a letter of intent:

• Demonstrate that the letter is not legally binding.
• Personal information about the parties
• All activities must be carried out in order to reach a final agreement.
• Provisions that must be verified through transaction due diligence.
• Details on why the parties are negotiating and their strategy.
• All information must be kept private.
• Negotiate exclusive rights.
• Legal jurisdiction is used to resolve business disputes.
• A completion date and identification of the party who will include the LOI in the agreement.

Before one of the parties signs the final contract, the preliminary conditions for drafting an agreement of intent must be met. Permission from regulatory agencies, for example, may be required, or a third party may be required to enter into another transaction or contract. It is generally accepted when developing a letter of intent that the transaction must be approved by the company's shareholders or partners. Another such condition is that one of the parties may conduct transaction due diligence (DD).

The purpose of the verification system of one party's files and structures to the next is to persuade the person undertaking the DD of the contract's risks. Additional contract terms can help to mitigate risks. At the conclusion of the transaction, the company due diligence procedure can check the reliability and fairness of the company's reporting, the presence of adverse actions in the past that may influence future results, and the outcome of the specific deal.

Creating a letter of intent: What is a binding contract?

A letter of intent becomes a legally binding contract if it contains:

• рrovisions required for signing the contract; 
• manifestation of the parties' mutual desire to bind each other by obligations.

One of the most important requirements in drafting a commercial contract for the purchase and sale of real estate is that it include information about the parties' identities, a description of the property being acquired, and the purchase price. If these important conditions are contained in a letter of intent and it is signed by the parties (only in this case will the document be enforceable), the court will recognize the agreement of intent as a valid and enforceable contract, despite the fact that it may be missing items that the parties intended to include in the «final contract».

To be considered a full-fledged contract, a letter of intent must contain the main provisions of the contract and show that the parties intended to be bound by the terms of the agreement.

Several factors are considered when determining whether contract terms have been included when developing a letter of intent:

• The parties' relationship.
• Is the contract's main terms included in the document.
• Document types that are used in this type of contract.
• If one of the parties fails to fulfill its obligations, whether the letter of intent contains a remedy.
• Reasons for the preparation and execution of a letter of intent.
• Actions taken by the parties following the signing of the letter of intent.

The correct execution of the document, as well as the presence of the required details, will give legal effect to the intentions expressed in the letter.

The obligation to negotiate in good faith

Although the memorandum of understanding does not create a signed agreement, the court may rule that the document compels the parties to continue bargaining the terms of the transaction. This occurs when both parties cannot offer unjustified or shifting conditions requirements that differ from the requirements found in the letter of intent when drafting an accord of intent. To communicate and organize, each side will need to take good measures to collaborate with the other side - action will rely heavily on the scope of the commitment to negotiate a deal.

Are letters of intent legally enforceable?

Because a letter is not legally binding, it cannot replace a full-fledged legal contract. To avoid legally binding obligations, it is critical to carefully consider all of the requirements of this document when drafting a letter of intent. All the nuances of the parties' relationship who want to agree on the details of a future transaction are indicated in such an agreement. To resolve disputes that may arise when one of the parties fails to fulfill its obligations, you should consult with lawyers who can advise you on the consequences of breaching an agreement of intent and provide potential solutions to disagreements.

Conclusion

Some issues can be avoided when the parties finalize contract negotiations if letters of intent are used correctly. It is critical to clearly state the main conditions when drafting an agreement of intent; this will help to avoid uncertainty and reduce risks for both parties.

A thorough letter of intent used in a major transaction can benefit both parties. It is preferable to entrust the document's preparation to professionals, especially when drafting an international agreement of intent.

Even if the parties have not yet signed the final agreement, the letter of intent can become a binding contract and create certain obligations. Contact us and get detailed and complete answers to your questions. IQ Decision UK experts can advise you on the development of an agreement of intent or accompany you in negotiating the terms of an international agreement of intent.