What is LOI and When Is It Used?

Before parties sign a legally binding contract for business or collaboration, they sign an LOI or Letter of Intent. Learn what LOI is and how to create one according to the situation.

What Is LOI?

A letter of intent is a document that declares the initial commitment of one party to do business with another. Usually, this letter contains the main terms of a possible deal. While LOI is used in significant business transactions, it can also be used for academic and personal purposes. 

If you are about to sign an LOI, remember that it is not a substitute for a contract. You must sign a legally enforceable agreement before working for some organization or doing business with them. The common elements of an LOI are:

• A formal salutation and a paragraph stating the intent to enter into a contractual relationship or business transaction
• Clear identification of the involved parties in the potential agreement, along with their legal names, contact information, and addresses
• An outline of the nature of the proposed deal, the type of transaction, and a general description of the assets or rights involved
• Provisions regarding exclusivity and confidentiality of the LOI for a specified period
• Fundamental terms and conditions that will be included in the final agreement
• Any due diligence processes or regulatory approval has to be met before the formal agreement.
• Clauses of termination of the LOI by both parties

When to Use LOI?

• An LOI is used as the starting point of discussion for any kind of business negotiation. These include mergers and acquisitions, joint ventures, partnerships, funding and investments, real estate transactions like buying and selling a property, etc.
• Before licensing intellectual property or transferring technology rights, an LOI is used to outline the main agreement terms, such as the scope, royalty or payment, exclusivity, and other vital provisions.
• The use of an LOI is done by applicants when they apply for academic programs, scholarships, or research opportunities. 
• Nonprofits also use an LOI for a grant or funding from the government, foundations, or other philanthropic entities. They also use it while appointing volunteers. 
• Educational institutions or research centers also use an LOI for partnerships like educational exchanges, resource sharing, or joint research projects. 

How to Create a Letter of Intent? 

If you want to create an LOI, you can follow the steps mentioned below: 

#1. Start With Header and Contact Information

The document should start with your name, address, contact information, and email address. Following these, you need to include the date of writing and the contact information of the recipient, such as name, title, organization, and address.

#2. Add Salutation

Address the recipient by their name, or use a professional salutation if the person’s name is not available.

#3. Introduce the Intent 

The opening paragraph should clearly express your intent to enter into a formal agreement or transaction with the other party.

#4. Identify the Involved Parties

The document should Identify all the parties of this proposed agreement and provide their full legal names and contact information.

#5. Describe the Scope of Business

The LOI should include the nature of the transaction or business, any specific goods, services, or assets involved, the scope of the transaction, and specific goals or objectives the parties aim to achieve.

#6. Mention Key Terms and Conditions

The letter of intent should also include fundamental terms that the parties intend to include in the final agreement. These are financial terms, responsibilities of both parties, timeline and milestones, IP rights, confidentialities, timeline conditions, payment method and schedule, and termination conditions.

#7. Wrap Up the Document

Professionally close the document with your name and contact information. Before that, you can that the other party for their time and express your enthusiasm for further discussions before the formal agreement.

#8. Proofread the LOI

After the LOI is complete, carefully read it aloud to find out any grammar, spelling, and punctuation mistakes. It will also help you ensure the clarity, coherence, and consistency of the document. If necessary, you can also edit it.

Manually creating an LOI from scratch is a time-taking process. Hence, most people prefer using LOI templates where the framework is already present. Users need to add their personal information and business-specific data to customize the LOI according to their choice.

The recent groundbreaking advancement in the field of AI has made creating LOI documents a lot easier. Now, you can also prompt tools like ChatGPT or Bard to create an LOI for your particular situation or purpose, and it will generate that within a few seconds.

For example, I have asked both AI tools to generate an LOI using the following prompts. Here are the replies I got from these:

Question 1. “Write me a letter of intent for hiring a freelance graphics designer for designing a logo for my website.”

The screenshot of ChatGPT’s reply:

The reply from Bard is in the screenshot:

Question 2. “I am a student who wants to get admitted to the Masters of Arts in English at Harvard University. Write me a letter of intent.”

ChatGPT generated this customizable LOI for me:

Bard replied with this document:

Difference Between MOU and LOI

An MOU is a document that outlines the intentions of two or more parties to work together on a specific project. On the other hand, an LOI states the intention of one party to enter into a formal agreement or transaction with another party. An MOU:

• Establishes the framework for cooperation and collaboration between the parties. But, LOI expressed the interest and key terms of a potential deal.
• It could be both legally binding or non-binding, depending on the language and intention of the document. On the flip side, an LOI is generally a non-binding document but may include legally binding provisions of confidentiality or exclusivity.
• It is a comprehensive document that covers all possible aspects of the proposed collaboration. Contrarily, LOI is a less detailed document that only mentions the fundamental conditions of a potential deal.
• It is a flexible document with scope for adjustments and modifications during the negotiation process. On the other hand, LOI is a relatively final document before entering into a formal agreement. 

Is LOI Legally Binding?

Usually, a letter of intent is not legally binding. However, it can legally binding based on the wording used in it and the court’s decision. Courts consider the written expression of an LOI and the actions of the involved parties after the letter has been signed to decide if an LOI is legally binding.

If the involved parties have a history of non-binding LOIs, the court would be more likely to dismiss an LOI as a legal contract. Remember, the laws are ambiguous, and the court often depends on the jurisdiction and the LOI category to consider it legally binding. 

Examples of Letter of Intent

#1. LOI for Students

This letter of intent comes from a student who is willing to get admitted to a graduate program of a university and also wants to avail of a scholarship. Apart from the intent, the student’s current job profile and contact information are mentioned here.

#2. LOI for Government Agencies

This is an LOI done between a government agency and a bank. Their intent of collaboration is mentioned here, along with areas of collaboration. 

Want to create the perfect cover letter? Here are the Best Cover Letter Creators at your service!

Wrapping Up

Whether you are about to get into a contract for business or personal purposes, LOI is the perfect document to start. While it is not legally binding in most cases, it helps both parties to get a clear idea about how the final agreement would turn out to be.

To get a letter of intent, you can follow the manual steps, use an editable template, or use AI tools like ChatGPT or Bard. You can also check out the resources for legal document templates.