What is a letter of intent? Explanation and use

What is a letter of intent? It is a unilateral written statement in which a party sets out its intentions, without thereby creating a binding agreement. Unlike a mutual letter of intent, only one party signs this. You use a letter of intent to seriously put an intention on paper, for example to a financier, a business partner, or a landlord, while keeping the deal itself open. Its legal force depends entirely on the wording.

The short answer

• What: a unilateral declaration in which a party sets out its intention.
• Unilateral: unlike a letter of intent, only one party signs.
• Goal: To seriously demonstrate an intention without committing yourself definitively yet.
• Binding or not: usually not, but the wording can still create obligations.
• When: for financing, collaboration, lease, subsidies, and support to a subsidiary.

What is a letter of intent and when do you use it?

A letter of intent is a tool to provide direction without committing yourself fully. The declaring party states: this is what I intend to do, under these conditions. As a result, the recipient knows where they stand, even though there is formally no contract yet. This makes the letter of intent suitable for situations where you are serious, but the details are not yet finalized.

Common situations in the SME sector include a statement to a bank indicating your intention to take out financing, a statement to a landlord stating your intention to rent a property, or a statement from a parent company that it will support a subsidiary. In the latter case, this is also referred to as a letter of comfort.

Letter of intent versus letter of intent

The most important difference lies in reciprocity. A declaration of intent is unilateral: one party declares something, and the other takes note of it. An agreement of intent or letter of intent is mutual: both parties sign and assume obligations, for example regarding confidentiality and exclusivity.

• Letter of intent: unilateral, suitable for an intention you only wish to make known.
• Letter of intent: mutual, suitable for a negotiation process in which both parties wish to commit to something already.

Therefore, choose wisely. For an acquisition involving due diligence and exclusivity, the mutual variant is almost always the right instrument. For merely announcing an intention, a unilateral declaration suffices.

Is a letter of intent legally binding?

This is the question that is most often underestimated. A letter of intent is not automatically without obligation. Whether obligations arise depends on the wording and on what the recipient could reasonably infer from it. If you write that you will pay an amount or support a daughter, an enforceable obligation may be implied. If you write that you have the intention and will elaborate on the plan further, it usually remains without obligation.

If you want the declaration to be non-binding, explicitly state that it is an intention, that no rights can be derived from it, and that a definitive agreement only comes into existence after separate signing. If you do wish to bind specific parts, formulate those parts concretely and measurably.

The pre-contractual phase and termination

The pre-contractual phase also plays a role in the case of a unilateral declaration. Under Dutch law, parties in negotiations are governed by the principles of reasonableness and fairness (Article 6:2 of the Dutch Civil Code). A letter of intent may create a belief on the part of the recipient that an agreement will be reached. Case law from the Supreme Court indicates that breaking off negotiations is permitted in principle, but may become unacceptable if the other party had a justified reason to rely on it. In that case, liability may arise for costs incurred and sometimes for lost profits.

A letter of intent formulated too definitively can therefore have a greater impact than intended. Therefore, be careful with words such as promise, guarantee, or bind, unless you genuinely wish to enter into that obligation.

A brief illustration: an SME entrepreneur sent a letter of intent to a supplier stating that he would purchase a fixed volume for the coming year. When he later backed out, the supplier relied on the statement. Because the text was concrete and affirmative, a dispute arose regarding whether a purchase obligation already existed. This could have been prevented with a clear non-binding clause.

Honest recommendation

You do not need a lawyer for a simple, clearly non-binding statement. Write down clearly what you intend to do, add that no rights can be derived from it, and you are done. However, as soon as the statement is sent to a financier, a landlord, or a parent company and money or support is involved, the wording becomes crucial. In that case, a statement intended to be non-binding can create obligations after all. Have the text checked in that instance. A single emphatic sentence too many can bind you to something you did not want.

Want to read more? View the letter of intent on our contracts page, read how to drafting a letter of intent , or discover what it costs to have a letter of intent drafted .

Frequently Asked Questions