Reed Law Monthly - February 2010


LOIs: Top 5 Dos & Don’ts

Use LOIs effectively to save time and money, while avoiding unintended consequences.

    Do:

  1. Do use a LOI when the transaction is complex and/or you anticipate it will be aggressively negotiated. Typically, it’s easier to get the proposed business terms down in a LOI, thus reducing the time and cost required to negotiate and document a definitive agreement.

  2. Do include a clear “non-binding” clause. Under most circumstances, and almost always for sellers of assets, it’s better for the LOI to be non-binding. The LOI will lack certain details that will need to be addressed in a definitive agreement. A binding LOI could put you at a severe, and unintended, contractual disadvantage.

  3. Do have an attorney review your existing form LOI and/or draft a form customized to your typical transactions. It’s not always necessary to have legal counsel draft a LOI for each transaction, but it is advisable for them to prepare or at least review your form document.


    4. Don’t:

  4. Don’t expect the LOI to cover everything that would otherwise be included in a definitive agreement. The LOI should cover the key business points, and indentify any “deal breakers” the parties to the transaction may have.

  5. Don’t use language that could create “binding” intent or other unintended contractual obligations. If a LOI is disputed, courts will look at a number of factors, including the type of language used in the document.