When to use a letter of intent in negotiations

What a letter of intent is actually for

A letter of intent is a short document that records the shape of a deal while the detail is still being negotiated. You may also hear it called heads of terms, a memorandum of understanding, or a term sheet. Whatever the label, the idea is the same: it captures the main commercial points — who, what, roughly how much, by when — without pretending that the full contract is finished.

For a freelancer or a small business, this matters for very practical reasons. It gives you something to show a subcontractor before you book their time. It reassures a landlord, a bank, or a supplier that a project is real. It also gives you a way to check that you and the other side actually mean the same thing before anybody spends money on drafting a full agreement.

When a letter of intent earns its keep

They are not always necessary, and using one for a straightforward two-week piece of work is usually overkill. They come into their own when:

• The project is long or complex, and you need to start planning resources before the final contract is signed.
• You will need to commit to third parties — booking a specialist, ordering materials, or turning down other work.
• A lender, insurer, or investor wants evidence that the arrangement is genuine.
• Several parties are involved and you need everyone aligned on the same set of assumptions.
• You want to test how serious the other side is before investing hours in detailed negotiation.

In each case the value is in the clarity it creates, not in its legal weight. Treat it as a working document, not a trophy.

Binding or not? Decide, and say so plainly

This is the part that causes the most trouble. A letter of intent can be entirely non-binding, partly binding, or fully binding — and what the courts look at is the substance, not the title. In England and Wales, labelling a document “subject to contract” is a strong indication that neither side intends to be bound until a formal contract is signed, but it is not a magic spell. If the terms are certain, all the essentials are agreed, and the surrounding correspondence suggests you both meant to commit, a judge may find a binding contract anyway.

Scotland is worth flagging separately, because Scots law gives less absolute protection to the phrase “subject to contract” and places more weight on what the parties objectively intended. If your counterparty is north of the border, draft with extra care.

The fix is simple: say what you mean in the document itself.

The clauses that usually should bind

A common and sensible approach is a “part binding” letter of intent. A short clause lists the provisions that are intended to be legally binding, and a second clause confirms that everything else is not.

• Confidentiality — you are about to share commercial information, so protect it.
• Exclusivity — if you are pausing other negotiations, put a firm end date on it.
• Costs — who pays for what during the negotiation, and whether each side bears its own legal costs.
• Intellectual property — who owns anything created while you are still talking.
• Data protection — if personal data is being shared, set out the basis for doing so.
• Governing law and jurisdiction — dull, but it decides where a dispute would be heard.

Be cautious about promising to “negotiate in good faith”. Such clauses are notoriously difficult to enforce in England and Wales, and a binding obligation of that kind can create more argument than it prevents.

A practical checklist before you send it

• State expressly whether the document is binding, non-binding, or partly binding.
• Name the parties accurately, using full legal entity names.
• Describe the scope, the price or how the price will be calculated, and the key dates.
• Set an expiry date, so the document does not linger indefinitely.
• Set out the next steps and who is responsible for each one.
• Include a clear statement that no work is authorised until a contract is signed.
• Get it signed by someone with authority to sign, and keep a dated copy.

Keep the whole thing to two or three pages. A letter of intent that runs to fifteen pages has stopped being a letter of intent and started being a badly drafted contract.

Traps to watch for

The most common mistake is assuming that the title protects you. It does not. If you exchange drafts that cover every essential term, with no “subject to contract” wording and no statement that the document is non-binding, you may have created a contract by accident.

Watch out too for these:

• Loose language in emails. “Great, we have a deal” can be used as evidence of agreement. Keep negotiation emails factual and refer back to the letter of intent.
• Open-ended exclusivity. If you agree not to talk to anyone else, give it a deadline.
• Drift. A letter of intent that sits unsigned for months while work quietly begins can become a de facto agreement on terms you never properly checked.
• Conduct. If you start delivering and the other side accepts and pays, you may have formed a contract on the terms in the letter, whether you intended to or not.

Set a diary reminder to review or convert the document. If talks stall, a well-drafted letter of intent gives you a clean way to step back without an argument about liability. If talks succeed, it gives your solicitor or adviser a head start — and gives you a deal that matches what you thought you had agreed.