Legal Tip of the Week: The Hidden Dangers Lurking in Letters of Intent

Letters of Intent (“LOIs”) are often treated as a routine first step in business transactions. Whether in real estate deals, business acquisitions, or commercial partnerships, parties frequently use LOIs to outline key terms before investing the time and expense required for a definitive agreement.

But here’s the reality: LOIs are not as harmless as many believe.

While they are commonly labeled as “non-binding,” LOIs can create significant legal exposure—especially when one party begins to treat the deal as if it is already finalized.

The Illusion of a “Done Deal”

One of the most common issues with LOIs is the disconnect between the parties’ expectations. After signing an LOI, one party may believe the material terms are agreed upon and that closing is simply a matter of paperwork. Acting on that belief, they may begin:

• Investing capital into the project

• Turning away other opportunities

• Allocating internal resources

• Taking preliminary operational steps

Meanwhile, the other party may still view the LOI as a preliminary framework—fully expecting that key terms remain negotiable or that the deal may not move forward at all.

When the deal ultimately falls apart, that mismatch in expectations can quickly turn into a legal dispute.

“Non-Binding” Doesn’t Always Mean Non-Enforceable

A critical mistake parties make is assuming that calling an LOI “non-binding” eliminates all legal risk. It does not. Certain provisions within an LOI are often intended to be binding and enforceable, such as:

• Confidentiality provisions

• Exclusivity or “no-shop” clauses

• Cost allocation provisions

• Governing law and dispute resolution clauses

Beyond that, courts may look beyond the label of “non-binding” and examine the conduct of the parties. If one party reasonably relies on the LOI to their detriment—and the other party was aware of that reliance—legal claims may arise, including:

• Promissory estoppel

• Misrepresentation

• Breach of an implied duty to negotiate in good faith

In other words, the substance of the relationship—not just the label—can determine whether liability exists.

The Risk of Acting Too Soon

One of the most dangerous aspects of an LOI is not the document itself, but what happens after it is signed. Problems arise when parties begin operating as though a final agreement is already in place. This can include:

• Making financial commitments

• Beginning performance under anticipated terms

• Publicly announcing or representing that a deal is in place

These actions can strengthen a claim that a party relied on the LOI—and that such reliance was reasonable. Once that happens, walking away from the deal becomes much more complicated and potentially costly.

How to Protect Yourself

LOIs can still be valuable tools when used correctly. The key is to approach them with the same level of care as a binding agreement. Consider the following best practices:

• Be precise with language. Clearly state whether the LOI is binding or non-binding, and avoid contradictory provisions.

• Identify binding provisions. Explicitly list which sections (if any) are intended to be enforceable.

• Include clear disclaimers. State that no party is obligated to complete the transaction unless and until a definitive agreement is executed.

• Limit reliance. Avoid taking significant action based solely on an LOI.

• Control expectations. Ensure both parties understand that negotiations are ongoing and that material terms may change.

  
  

The Bottom Line

A Letter of Intent is not just a formality—it is a legal document that can carry real consequences. The danger lies in the gray area it creates: not quite binding, but far from risk-free.

Before signing—or acting on—an LOI, it is critical to understand what obligations may already exist and what risks you may be taking on.

Because in many cases, the biggest problems don’t arise from the final agreement—they start long before it is ever signed.

Hoffman Law Offices, LLC – Protecting your interests before the deal is done.

Disclaimer: This article is for informational purposes only and does not constitute legal advice. Reading this material does not create an attorney-client relationship. For advice regarding your specific situation, please consult with legal counsel.