This article posted on our partner site Mondaq.com explores the nature of transaction letters of intent or (LOI's).

An LOI is typically used as the first step of a deal and should briefly outline the key elements of the proposed transaction (e.g. selling or purchasing a business). In order to expedite the initial negotiation process LOI's are generally intended to be non-binding in regards to business terms. This is based on the understanding that a more detailed, definitive and binding agreement will be drafted. LOI's should be taken seriously. An LOI can be referred to should one party wish to deviate from a business term when finalizing the binding agreement.

Certain terms of an LOI are typically specified to be legally binding (i.e. confidentiality and "no shop" clauses). Explicit expectation of more comprehensive and legally binding agreement is crucial in transaction LOI's.