Letter Of Intent’s Most Important Requirement

Whether contemplating the purchase of a business or the desire to make a charitable contribution, an underutilized mechanism is the “Letter of Intent.” This document refers to making a solicitation to an offer, rather than an offer itself. This has important legal consequences, as the other party’s response to a “solicitation to offer” places no obligation upon the letter of intent writer, whereas an offer gives the other party the power to legally bind you to your statements in the event that what you see is construed as an offer.

The distinguishing characteristic of a letter of intent (LOI) is that it suggests a contemplation that an agreement can be reached in the future rather than uses language that suggests that a deal can be consummated right now. Most notably, a letter of intent states uses word like “It is our expectation that we will be able to offer…” or “We hope that we will be able to offer…” The best practice, out of an abundance of caution, is to label letters of intent with language stating that the document is not an offer, but rather a solicitation to offer.

Letters of intent are powerful tools when it comes to reserving your power in a business negotiation or seeing that your intentions are followed in the charitable giving context.

Business Letters of Intent

In the field of business negotiations, competitive advantages often accrue to the drafter of the terms as well as the party that has the final say as to whether a contract exists or not. In a way, this is trying to have your cake and eat it too—usually, the one drafting the terms becomes the offerer, and the one that chooses whether or not to accept and thereby create legally binding contractual relation is the offeree.

A letter of intent can be useful can be useful because it captures much of the benefits that normally exist with being the draftsman to a contract while also retaining the power that gets to be the party that chooses to accept the offer.

Usually, the consequence involves the party drafting the letter of intent stating the essential terms to the business agreement—the price, scope of the agreement, unique terms—expressed in the language of future intent, e.g. “I hope that we will be able to purchase this property for $400,000 by March 3rd.” The advantage of this approach is that you are not “left hanging” while the other side gets to choose whether or not to do the deal—you haven’t given them anything to accept. Meanwhile, if the party states: “If you pay me $425,000, I will sell you the property” you now have a “reasonable amount of time” to contemplate the offer presuming it is not revoked.

Now, of course, there are ways that an offer can embed these advantages as well. An offer can include an explicit deadline that states that it will cease to exist after a certain amount of time or upon the passage of some event (such as another offer prior to acceptance) or an offeror can get tired of waiting for the acceptance and simply communicate that the offer has been revoked.

The enduring advantage of a letter of intent then is that it is riskless. Once an offer is extended, the other side has a power to create legally binding consequences for you upon their acceptance. Because voluntarily taking on legal obligations should feel like an important responsibility, the opportunity should not be created until you are certain of your willingness to comply with the contemplated obligations.

There is where the letter of intent to purchase can often be useful. It alerts the other party to the contract of your suggested terms, and by doing so, lets each side negotiate without exposing themselves to the possibility that they might inadvertently create legal obligations before they intend to do so.

Charitable Letters of Intent

When it comes to charities, the charity solicitor will prefer that the donor make a donation using irrevocable language because (1) technically, this gives the charity the right to sue the donor or the donor’s estate on estoppel grounds if the donation is not actually made; (2) the recipient gains the right under United States accounting law to treat it as an account receivable (i.e. something earned); and (3) presumably, donors that make irrevocable pledges are more likely to actually follow through on the donation that someone who makes a tentative pledge.

By looking at these advantages to the recipient of an irrevocable pledge, it is easier to see why a non-binding letter of intent can be a superior tool for the donor.

First, if you are not intending to presently transfer the amount that you intend to donate, this means there is some aspect of tenuousness to the funds being donated. Maybe the money consists of future earned income or is tied up in investment accounts, but there remains some possibility that the money could be diminished or lost before the donation is made. To protect against this low probability event, it is often best to turn to the non-binding letter of intent. If the funds do indeed become available at the time that the intended donation would be made, then the recipient still receives the benefit of the promise while the donor retained protection against adverse changed circumstances.

And secondly, it provides the opportunity for greater care in the relations between the donor and the recipient. The best treatment that a donor will ever receive from an institution is during the period between when a donation is suggested but not yet finalized. By extending this period, the donor’s needs and preferences will be tended to more than if an irrevocable pledge is made and the recipient institution no longer feels as strong of an obligation to cater to the donor.

Sports Letters of Intent

Unfortunately, college sports have muddied the proper understanding of what letters of intent really do. With athletes, a letter of intent means that a senior in high school is agreeing to accept scholarship funds from a particular school in exchange for the promise to attend the particular school for at least a year with the school’s remedy being that the athlete cannot play somewhere else the following season.

In this context, it would be more accurate to describe the letter of intent as a contract exchanging scholarship funds for a commitment to attend the school for at least one year, with the letter of intent portion covering the athlete’s intention to play at the school thereafter. Also, the word “intent” gets used because it is describing a future promise to attend a certain school for the next year, subject to the caveat that the athlete can change his mind if he is willing to refrain from participating in athletics during the first year.

Also, the word intent is applied because it involves certain conditions that have not yet been performed—e.g. the athlete may still need to be accepted by the admissions department before the LOI becomes operative.

Still, the sports letter of intent is a contract that is legally operative. If a player signs a letter of intent, goes to a different school, and shows up to play a game, the original intended school and the NCAA can take the athlete into court to receive an injunction that bars his performance for a year. This is distinctly different from the original usage of the word, as well as the word’s application in the business and charitable context, because it is supposed to mean a prefatory solicitation to enter a contract rather than an actual offer.

Letters of Intent Revert Back to the Express Language

The reason why sports letters of intent usually become legally operative documents while business and charitable letters do not is because of the express language contained in it. With a sports letter of intent, there is a declaration that a year of playing eligibility will be forfeited if the player attends another school while the university is binding itself to pay a certain amount of scholarship funds for the first year. There is no future looking language—it is worded to contain present language describing future obligations.

In the business and charitable context, it is important that the express terms contain a future intent to entertain offer rather than a present intent that is resulting in an offer. The words “I might be interested in”, or “I’m thinking about”, or “I hope to” preceding the words “pay X for Y” can often be the difference between casual negotiations and saying something that can be legally binding. Letters of intent, properly worded, are great tools because they can outline the terms and lead to an agreement without creating exposure before you are actually prepared to be legally bound by the agreement.

Notice: This article is not legal advice, and should be read strictly for entertainment/informational purposes only. As noted above, precising wording matters, and contract laws vary between the states.