What a Letter of Intent Actually Commits You To
A letter of intent (“LOI”) sets out the basic terms of a proposed deal before the definitive agreement is negotiated: the price, the structure, the major conditions, and the timeline. It is usually described as non-binding, and most of it is. The parties are recording where they have landed in principle, not committing to complete the deal.
Despite the label, many LOIs are not entirely non-binding. Certain provisions are intended to bind the parties from the moment the LOI is signed, and those provisions can carry real consequences well before anyone has committed to the transaction itself. A party that treats the whole document as a preliminary formality can find itself locked into obligations it did not focus on, at a stage when it thought nothing was final.
Reading an LOI correctly requires separating the provisions that legally bind from the terms that primarily shape the negotiation. The binding provisions create enforceable obligations from the moment the document is signed, while the non-binding provisions frame the negotiation that follows.
What Binds and What Does Not
A well-drafted LOI is explicit about which provisions are binding and which are not. The economic terms, the deal structure, and the conditions to closing are generally non-binding. They describe the deal the parties intend to negotiate and ordinarily do not require either side to complete the transaction. But the LOI may separately require the parties to negotiate in good faith or within an agreed framework, which can limit how freely a party may abandon or materially change the proposed terms. The definitive agreement remains necessary because it supplies the detailed rights, obligations, risk allocation, and closing mechanics that the LOI does not attempt to resolve.
A defined set of provisions is typically intended to bind immediately. These often include exclusivity, confidentiality, expense allocation, governing law, dispute resolution, public-announcement restrictions, and access or noncontact rules during diligence. They are the operative terms of the LOI and are enforceable as soon as the document is signed, regardless of whether the deal ever closes.
The single most important drafting point in any LOI is that the binding and non-binding provisions be clearly separated and labeled. An LOI that states plainly which sections bind and which do not gives both parties certainty about their exposure. An LOI that is vague on the point invites a later dispute about whether the economic terms, or some other provision, were meant to bind. Courts have found binding obligations in documents the parties assumed were entirely preliminary, particularly where the language and conduct suggested a present commitment. The label matters, and so does the precision of the drafting behind it.
The drafting objective is straightforward: identify every binding provision expressly and state that all remaining provisions are non-binding, subject to any expressly stated duty to negotiate. An LOI drafted that way gives both sides greater certainty, and the party asking for that clarity gives up nothing by raising it.
Exclusivity: The Provision That Changes Your Leverage
The exclusivity provision, often called a no-shop, is usually the most consequential binding term in an LOI. It commits the seller not to solicit, negotiate, or entertain competing offers for a defined period while the buyer conducts diligence and the parties negotiate the definitive agreement.
Exclusivity is reasonable from the buyer’s side. A buyer about to spend significant time and money on diligence does not want the seller shopping the deal to drive up the price or using the buyer’s offer as a stalking horse. But exclusivity shifts leverage decisively toward the buyer for its duration. Once the seller is locked into exclusivity, the seller has given up its most powerful negotiating tool, which is the credible ability to walk to another buyer. A buyer that knows the seller cannot go elsewhere may have increased leverage to renegotiate terms as diligence proceeds, particularly when diligence identifies issues affecting valuation, structure, or risk allocation. Buyers sometimes use that leverage to push the economics down as diligence proceeds, a tactic known as retrading.
The length of the exclusivity period is therefore a real negotiation, not a formality. A period long enough for legitimate diligence is appropriate. A period longer than that hands the buyer leverage for no corresponding benefit to the seller. Beyond shortening the period, a seller can seek diligence milestones, financing deadlines, or a right to terminate exclusivity if the buyer stops actively pursuing the transaction or proposes a material retrade. Exclusivity is an enforceable contractual right that can support meaningful remedies, so these terms are worth negotiating rather than accepting as standard.
Confidentiality and Expenses
Confidentiality provisions in an LOI bind the parties to keep the existence and terms of the discussions, and the information exchanged during diligence, confidential. Often the LOI incorporates or supplements a separate confidentiality agreement signed earlier in the process. These provisions matter to both sides. The seller does not want the market, its employees, or its competitors to know it is in a sale process. The buyer does not want its interest or its strategy disclosed.
The confidentiality terms deserve attention to scope and duration. What information is covered, how long the obligation lasts, what disclosures are permitted, and what happens to confidential information if the deal does not close are all terms worth confirming rather than assuming. Because confidentiality provisions bind immediately and survive a failed deal, they are among the LOI terms most likely to matter long after the transaction itself is abandoned.
The expense provision allocates who bears the costs of the transaction. The common default is that each party bears its own expenses, which is generally reasonable. Some LOIs go further and require a fee or expense reimbursement if the transaction fails in specified circumstances. An obligation to reimburse the other party’s expenses if the deal fails is a binding financial term that changes the cost of walking away and deserves the same scrutiny as any other.
Why the Non-Binding Terms Still Matter
The economic terms of an LOI are non-binding, but that does not make them unimportant. They set the reference point for the negotiation that follows, and moving away from them later carries a practical cost even when there is no legal barrier to doing so.
Once a price is stated in an LOI, it becomes the anchor. A buyer that later tries to negotiate the price down, or a seller that tries to push it up, is moving away from a number both sides already agreed to in principle. That is possible, but it requires a reason, and it costs credibility and goodwill. The terms set out in the LOI, even the non-binding ones, tend to hold unless something in diligence justifies a change. This is why negotiating the LOI carefully matters even for the provisions that do not bind. The LOI frames everything that comes after.
The same is true of structure and major terms. An LOI that specifies a stock deal, an asset deal, an earnout, an escrow, or a particular treatment of a key issue establishes the starting position. Reopening any of those points later is possible but harder than getting them right in the LOI. A party that treats the LOI as a placeholder, expecting to negotiate the real terms in the definitive agreement, often finds that the LOI terms have more staying power than expected.
The Takeaway
An LOI is usually non-binding as to whether the transaction will close. What it may bind is the parties’ conduct while they decide whether to close. Exclusivity, confidentiality, expense allocation, and any obligation to negotiate can take effect immediately and remain consequential even after the deal is abandoned.
The economic terms matter for a different reason. Price, structure, escrows, earnouts, and other headline provisions become the reference point for the definitive agreement. They may not be legally enforceable, but changing them later requires justification and can weaken a party’s negotiating position.
The LOI is more than a preliminary formality. It establishes the parties’ immediate obligations, reallocates negotiating leverage, and sets the reference point for the definitive agreement. It should be negotiated with the care those consequences deserve.
This post is general information only and does not constitute legal advice. For questions about a particular transaction or agreement, contact Cruxterra Law Group.
