Letter of Intent: Is It Legally Binding?

A letter of intent, often shortened to LOI, records what two parties have agreed in principle before the full legal contract is drafted. It is used across business sales, investment deals and commercial partnerships to set out price, structure and key terms early, giving both sides something concrete to work from before legal costs increase. The most common question business owners ask about an LOI is whether it binds them, and the honest answer is that it depends on how it is drafted. This guide covers what a letter of intent should include, its legal status, and what happens once it is signed.

What Is a Letter of Intent?

A letter of intent is a short document setting out the main commercial terms of a proposed deal, most often used in business sales, investment rounds and joint ventures. You will also see the same idea called heads of terms, a term sheet or a memorandum of understanding, the label matters less than what the document says. An LOI typically covers price, the structure of the deal, key conditions, and a proposed timetable, giving both parties a shared understanding to negotiate from before either side commits significant legal spend.

Is a Letter of Intent Legally Binding in the UK?

Usually not, for the core commercial terms. Most letters of intent are expressly stated to be subject to contract, meaning the price and structure remain non binding until a full agreement is signed. This gives both sides room to walk away if due diligence uncovers a problem. That said, specific clauses within an LOI are routinely drafted to be binding from the moment of signing, regardless of whether the wider deal goes ahead: confidentiality over information shared during negotiations, exclusivity preventing either side from negotiating elsewhere for a set period, and provisions on who pays costs if the deal falls through. It is worth checking exactly which sections of a document you have been sent actually bind you, rather than assuming the whole thing is either fully binding or fully not.

When Is a Letter of Intent Used?

An LOI shows up across a range of business transactions:

• Buying or selling a business, ahead of the full sale agreement.
• Raising investment, where it is often called a term sheet instead.
• Setting up a joint venture or strategic partnership.
• Agreeing a major supply, franchise or distribution arrangement.

What Should a Letter of Intent Include?

A well drafted LOI covers the same ground regardless of the type of deal:

• The parties involved and a brief description of the deal.
• The price, or the formula for calculating it.
• Key conditions that need to be satisfied before completion, such as due diligence or third-party consents.
• A target timetable for due diligence, drafting and completion.
• Confidentiality and exclusivity terms while the deal is negotiated.
• Which sections are binding, and which are subject to contract, stated explicitly rather than left to interpretation.

What Happens After a Letter of Intent Is Signed?

Signing an LOI is the start of the process, not the end of it. Both sides move into due diligence, and the buyer’s solicitor typically begins drafting the full agreement, whether that is a share purchase agreement, asset purchase agreement or investment document, using the LOI as the starting framework. If due diligence turns up something that changes the picture, the terms can still shift from what was agreed in the LOI, since the commercial terms were never binding in the first place. Anything that was drafted to be binding, confidential and exclusive, continues to apply throughout this stage regardless of whether the deal ultimately completes.

This is also the point where an exclusivity period, if one was agreed, starts to matter in practice. An exclusivity clause stops the seller negotiating with anyone else for a set window, often four to twelve weeks, giving the buyer room to complete due diligence without being outbid mid-process. If that window runs out before the deal completes, the seller is free to talk to other buyers again unless the parties agree to extend it, which puts a natural amount of time pressure on both sides to keep the process moving.

Letter of Intent Costs

Legal costs for drafting or reviewing an LOI are generally modest compared with the full agreement that follows, since the document is shorter, and the commercial terms are usually still being worked out. Costs increase where a deal is complex enough that getting the binding clauses right, particularly exclusivity periods and cost allocation if the deal falls through, genuinely matters. Ask for a fixed fee quote for the LOI itself, separate from the cost of drafting the full agreement later. As a rough guide, a straightforward single-buyer LOI for an SME sale costs considerably less to review than a multi-party investment term sheet with several conditions and a longer exclusivity period attached.

Common Mistakes to Avoid in an LOI

A handful of recurring issues cause more disagreement than the size of the document might suggest:

• Assuming the whole document is non binding, when specific clauses were drafted to bind you from signing.
• Leaving the exclusivity period open ended, which removes the other party’s incentive to move at any pace.
• Vague price wording that leaves the actual mechanism for calculating the final price unresolved until much later.
• No clear cost allocation if the deal falls through, leaving both sides exposed to a dispute over wasted legal fees.

How MAR Legal Can Help

If you have been sent a letter of intent, or you are preparing to issue one, MAR Legal can review it and flag anything that binds you before you sign, and can help draft the full agreement once terms are agreed.

Frequently Asked Questions