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A Letter of Intent (LOI), often referred to as “Heads of Agreement” or “Heads of Terms,” is a written document that confirms one party’s intention to enter into a business arrangement with another. It sets out the key commercial terms of a proposed deal before the detailed negotiations are completed and a formal contract is signed.
An LOI is commonly used at an early stage of discussions to record what has been agreed in principle while leaving room to finalise the finer details later.
A Letter of Intent helps both parties outline the broad structure of a proposed transaction before committing to a full legal agreement.
It is typically used to:
• Clarify the main commercial terms that still require negotiation
• Provide reassurance that both parties are serious about progressing the deal
• Establish a framework for continued discussions
• Protect sensitive information shared during negotiations
• Publicly confirm that negotiations are underway, where appropriate
In larger transactions such as mergers, acquisitions, or joint ventures, an LOI can serve as a strategic roadmap that guides the next stages of the deal.
Letters of Intent are widely used in significant commercial transactions and are usually drafted by legal professionals on behalf of businesses.
Common situations where LOIs are used include:
• Buying or selling a business, shares, property, or goods
• Creating partnerships between individuals or companies
• Negotiating commercial lease terms
• Engaging contractors to begin work before a final contract is agreed
• Applying for government funding or grants
• Recording arrangements in estate or guardianship planning contexts
In corporate transactions, an LOI may outline how an acquisition will be structured, whether by cash purchase, share exchange, or a combination of both.
While the contents vary depending on the transaction, most Letters of Intent include the following elements:
• A statement explaining the legal context of the document
• Full details of the parties involved
• Key obligations of each party
• Conditions that must be satisfied before a final agreement is signed, such as due diligence
• Clear wording stating which provisions are legally binding and which are not
• Terms covering payment for work carried out if the deal does not proceed
• A lockout or exclusivity clause preventing negotiations with competitors for a defined period
• Agreement on fundamental commercial terms such as scope of work, price, and timeline
• Proposed start date for work, even if before the final contract
• A target date for signing the final agreement
• Allocation of responsibility for drafting the formal contract
• Detailed descriptions of assets, property, or business interests involved
• Key lease terms such as rent, property type, and repair responsibilities, where relevant
Many LOIs also include confidentiality clauses and non-solicitation provisions to protect commercially sensitive information and prevent employee poaching.
Preconditions are requirements that must be fulfilled before the final agreement becomes binding.
These may include:
• Completion of due diligence investigations
• Obtaining regulatory approvals
• Securing third-party consents
• Reviewing company constitutional documents such as Articles of Association
• Obtaining shareholder approval where required
Carrying out proper due diligence at this stage helps identify risks before a binding contract is entered into.
Whether an LOI is legally binding depends entirely on its wording and how the parties behave after signing it.
Although the title “Letter of Intent” itself does not automatically create legal obligations, courts may treat certain provisions as enforceable if the language shows a clear intention to be bound.
Common binding provisions include:
• Confidentiality clauses
• Exclusivity agreements
• Payment terms for work completed
• Interim obligations where work has commenced
Even documents marked “subject to contract” may still create enforceable obligations if the conduct of the parties suggests a binding agreement exists.
For this reason, careful drafting is essential.
In some cases, a Letter of Intent operates as a temporary or interim contract.
This commonly happens when one party is asked to begin work before the final agreement is signed. The LOI then sets out:
• The scope of work
• Payment arrangements
• Time limits
• Risk allocation
Once the final contract is agreed, it may apply retrospectively. However, if no final contract is ever concluded, the interim terms may continue to govern the relationship.
Problems can arise if work continues after the LOI expires and no final contract is signed.
Possible outcomes include:
• The original interim terms continuing to apply
• A new agreement being implied from the conduct of the parties
• A claim for payment under the principle of quantum meruit, meaning reasonable payment for work performed
Each situation depends on the facts and the documentation involved.
If poorly drafted, a Letter of Intent can create unintended legal consequences.
Key risks include:
• Being legally bound when you did not intend to be
• Liability to pay for work completed even if negotiations fail
• Disputes over interpretation of vague terms
• Confidential information being misused
• Reputational damage if negotiations collapse
• Potential tax scrutiny where arrangements appear to be structured for tax advantage
Courts frequently require payment for work carried out under an LOI, even where no formal contract is ultimately signed.
After signing, the parties typically:
• Conduct due diligence
• Continue negotiating detailed contract terms
• Finalise and execute the formal agreement
In some cases, due diligence and negotiations take place simultaneously.
Before responding to an LOI, you should carefully review its terms and consider whether you agree with them.
You may:
• Accept the terms by signing and returning the document
• Propose amendments before agreeing
• Confirm acceptance verbally or by commencing work
• Decline the proposal
Clear communication is essential to avoid misunderstandings about whether a binding agreement exists.
It is possible to withdraw from a Letter of Intent. However, the consequences depend on whether any legally binding provisions exist.
Potential outcomes may include:
• Financial liability for work already completed
• Claims for breach of contract
• Legal disputes
• Damage to business reputation
Understanding your obligations before signing is critical.
Although an LOI is usually signed by both parties, a binding agreement can sometimes arise through conduct alone.
Some businesses prefer to use “Heads of Terms,” which serve a similar purpose but are often drafted more clearly to distinguish binding and non-binding provisions.
At Zavri Law, we understand that a Letter of Intent can either protect your position or expose you to unnecessary risk.
Simply inserting phrases such as “subject to contract” does not guarantee that a document will be non-binding. Courts look at substance over labels, particularly where work has already begun.
Our experienced small business solicitors can:
• Draft tailored Letters of Intent
• Review existing LOIs before you sign
• Advise on binding versus non-binding provisions
• Assess tax and commercial implications
• Help you minimise legal and financial risk
If you are considering entering into a Letter of Intent, contact Zavri Law for a clear, fixed-fee consultation and practical legal guidance.
Disclaimer: This content is provided for general informational purposes only and does not constitute legal advice. You should seek independent legal advice tailored to your specific circumstances before making any decisions.
