Drafting a letter of intent

Dear Mary, I read your last column about letters of intent and I think I need one for a deal I’m working on. Should I write it, or can they write it? What should it contain?

When discussing letters of intent, the first question should be who will draft the letter. Sometimes it’s easier to carefully review a letter; other times it’s more cost-effective to prepare your own document. There is some strategy involved in deciding whether to draft or review the letter.

The party that drafts the letter will decide whether it will be a one-page commitment, or whether it will be a longer, more specific letter.

The drafter identifies what issues the letter addresses, and which will be addressed later, as well as what the deal-breakers are. The drafting party can also make the initial call of whether or not the letter will be enforceable or binding. Of course, the reviewing party can make changes to the draft.

The basic premise of the letter of intent is that it will document about what the parties have already agreed, while identifying issues that need further clarification. It can be a great timesaving tool because it allows the parties to concentrate on the real issues, as opposed to negotiating the entire contract at once.

Once you begin writing the letter of intent, you will see what problems will be major and what issues can be resolved more easily.

The biggest hurdle in drafting a letter of intent is whether or not to make it binding. If you say in the letter that it’s not legally binding, that’s usually enough to make it non-binding. However, parties are sometimes disinclined to state that it’s non-binding because it might encourage the other side to feel free to back out.

Some portions of the letter should be binding, including confidentiality, non-solicitation, termination date, and access of information terms. If you’re negotiating buying a business, make the “bust-up fee” provision binding as well. A bust-up fee covers your time and costs if the seller backs out.

The portions of the letter that are usually non-binding relate to the configuration of the deal and the parties’ general interest in the transaction. Sometimes a letter of intent will let one side conduct its due diligence and back out of the deal if it is unsatisfied with the investigation.

In some situations, I recommend executing a separate confidentiality agreement outside of the letter of intent to protect your private information. If the letter of intent is found to be non-binding, a confidentiality provision in the letter won’t do you much good.

Please don’t make the mistake of moving forward with only a letter of intent and no contract. But if you do, the letter of intent can help resolve issues and clarify the rights and duties of each party. If you don’t have a contract and you end up in litigation, the court may look at the letter of intent to determine what the parties intended.

Your final contract should address every issue that comes up in negotiations, as well as some issues that may pop up in the future. The contract will also include typical provisions that weren’t in your letter of intent, like warranty disclaimers, limitations of liability, and alternative dispute resolution provisions.

Mary Luros is a business law attorney with Hudson & Luros, LLP, in Napa, and can be reached at mary@hudsonluros.com or 418-5118. The information provided here is not intended as legal advice, nor does it form an attorney-client relationship with the author. The author makes no representations as to the reliability or accuracy of the above information. In a perfect world we wouldn’t need disclaimers — or attorneys.