What is a letter of intent (LOI) primarily used for?

A letter of intent (LOI) is primarily utilized to express a party's intention to enter into a formal agreement in the future. This document serves as a preliminary communication, outlining the parties' general understanding and key terms that they agree upon before a definitive contract is finalized.

The importance of an LOI lies in its ability to clarify the intentions and expectations of the parties involved, which helps facilitate negotiations and sets the groundwork for the subsequent formal agreement. While an LOI might mention certain commitments or obligations, it does not bind the parties to those terms legally but indicates their willingness to move forward in the negotiation process.

Consequently, its role is foundational in establishing the relationship and understanding between parties, making it crucial in business dealings where parties are still in discussions about the finer elements of a contract. This serves to align expectations and prevent misunderstandings, ultimately leading to a more structured and clear agreement when the official contract is drafted.