What is a Letter of Intent?

A letter of intent is a statement of understanding between two or more parties. It describes the concerns arising from the suggested deal by validating the steps that are to be implemented. 

The letter of intent is generally not enforceable as a contract. Rather, it simply indicates the intentions of the parties to pursue negotiations and enter into a future agreement. The letter of intent can also be referred to as a pre-contract' or a memorandum of understanding.

How is a Letter of Intent Used?

A letter of intent commonly termed as Lol in the legal field is a paper that outlines one or two consensuses arising from two or more entities before the finalization of the agreement. The concept of the letter of intent matches that of heads of agreement, memorandum of understanding or term sheet. 

Such recorded consensus may be as a result of transaction agreements emanating from acquisitions and mergers, agreements of joint ventures, real property lease contracts and other kinds of contracts regarding transactions of materials and properties. The following are the main roles of a Letter of intent:

• It enables the concerned parties to draw the terms before they can spend their money in these contracts, conducting due diligence, following confirmation from the third parties amongst others.
• To officially put down the negotiating parties like in the case of proposals of joint venture and mergers.
• To provide measures to take care of deal gone sour in the process of negotiating.
• To clarify and raise concerns relating to the payments made for instance credit card payments.

Negative Aspects of Letters of Intent   

The parties to the deal may be involved in long and lengthy negotiations depending on the terms of the deal.

• The time for management and focus may be changed.
• During negotiations, other potential opportunities may be missed as the markets may not favor the parties involved.
• In case the deal does not materialize, the parties in the equation may lower their expectations with the hope of progressing in the future.
• Obligations regarding public disclosure may be triggered accidentally.
• The dangers associated with the need of some individuals to sell the letter of intent to other stakeholders or to the world.