A letter of intent is often considered “an agreement to agree.” This document is most often applied to business transactions, such as real estate sales or business mergers, in which both parties need an outline of terms, procedures, and rules before they can begin negotiating the real contract.
In most situations, a letter of intent is not a binding legal document, but many negotiators treat it as such. Contractual clauses may be added to the letter of intent, and courts will often hold those aspects up as legally binding, but the concept of a “pre-contract” is still a very contentious legal area.
Types of Letters of Intent
Generally, there are two categories of letters of intent, referred to as Courtship Letters and Trial Engagement Letters. Courtship letters offer no legal binding, but express interest from one or more parties to come to terms in a contract. The Trial Engagement Letters are often considered more binding, can include legally binding clauses which include penalties for backing out of negotiations, and are more often held up as legal documents in court.
Letters of intent are applied to many areas, but are most commonly applied to the following situations:
- Education and Academic Applications: a letter of intent to a university declares your interest in the school, the program to which you are applying, and declares why you would be an asset to the school’s program and community. Like a cover letter, you should discuss your academic experience, such as specific courses relevant to the academic program, and notable professors you have worked with, if any.
- Job Applications or Career Advancement: if you apply for a job, a letter of intent expresses your particular interest in working for the company as well as your qualifications for the job. While this can be mistaken for a cover letter in many cases, a letter of intent applied to a job application focuses on your interest in the company in addition to your experience.
- Business Transactions: letters of intent were created for use between businesses who did not have the time to negotiate with each other. As such, they are not inherently legally binding, but do set the standards to create legally binding contracts between businesses. Increasingly, businesses insert legally binding clauses in their letters of intent so that they have recourse if the agreement to negotiate is broken, not just the contract itself.
- Foundation Grant Funding: with many major grants, a nonprofit institution must send a letter of intent stating clearly why the business would be interested in and benefit from the grant. The grant committee will then send the application to the nonprofit if the letter of intent is clear enough and shows the grant could benefit the institution.
How is it Used?
The most common uses of letters of intent are:
- Obtain a preliminary agreement between two or more parties before business negotiations begin
- Clarify key negotiation points for all parties
- Establish confidentiality for some elements of the later contract
- Create an agreement between the parties to set the standard for later contract negotiations.
- Signal other competitors in business arrangements that the parties involved have made arrangements and will not accept competing offers
- Create safeguards for the parties in the event that the negotiations halt or cease, or that the later contract is broken