What Is a Memorandum of Understanding or Letter of Intent?

As a solicitor, I often get asked whether a “memorandum of understanding” or “letter of intent” has any legal weight.

These documents are commonly used in the early stages of commercial transactions, particularly when parties negotiate a business sale, a joint venture, or some other commercial collaboration. However, confusion often arises because they are not usually intended to be full, binding contracts, yet they are still important and can sometimes have binding legal consequences.

What Is a Memorandum of Understanding or Letter of Intent?

A memorandum of understanding (MOU) and a letter of intent (LOI) are essentially the same thing. They are preliminary documents that record the intention of two or more parties to enter into a formal agreement. They’re sometimes called heads of terms, term sheets, or letters of comfort – different labels, same idea.

They tend to include:

• A summary of what the parties have agreed so far

• A roadmap for how they intend to proceed

• Some basic protections to cover the negotiation period

You’ll usually see them in situations such as:

• The early stages of buying or selling a business

• Joint ventures or partnerships

• Securing investment

• Complex commercial contracts where the parties want to “get something on paper” before spending time and money on a full agreement

Are They Legally Binding?

This is the million-pound question.

Most of the time, the document will say that it is not legally binding, except for certain clauses. The idea is to make sure both parties are on the same page before entering into a legally binding contract later on.

That said, there are often parts that are intended to be binding. For example:

• Confidentiality clauses (to protect sensitive information)

• Exclusivity or “no-shop” provisions (so the seller doesn’t entertain other offers)

• Costs and legal fees (who pays for what during negotiations)

• Governing law and jurisdiction (just in case there’s a dispute later)

If you’re drafting or signing one of these documents, it’s vital to make clear what is binding and what is not. Ambiguity here can lead to expensive arguments down the line.

Common Purposes

The main reasons to use an MOU or LOI are:

• Clarity: It helps to get the key commercial terms agreed in writing before you spend time and money drafting full contracts.

• Commitment: It shows that both parties are serious. There’s a psychological benefit in having something signed, even if it’s not fully binding.

• Speed: You can move ahead with due diligence, financing or planning on the back of an LOI.

• Protection: Including binding confidentiality and exclusivity terms can give reassurance while the main contract is worked on.

What Should Be Included in an MOU/LOI?

Here are some tips on what to include in an MOU or LOI:

1. The Parties: Make sure the full legal names of the parties are clear. This avoids confusion later.

2. The Transaction Summary: This might be a sentence or paragraph describing what is being contemplated. For example:

   “The parties intend to enter into a share purchase agreement under which Buyer will acquire 100% of the issued share capital of Seller Ltd for a total consideration of £2,000,000.”

3. Key Commercial Terms: Include the main terms agreed, such as:

   • Purchase price and payment structure

   • Any earn-out or deferred consideration

   • Timetable for completion

   • Conditions precedent (e.g. due diligence, financing, board approval)

    

4. Exclusivity: If one party is to be given a period of exclusivity, this should be stated clearly with an end date.

5. Confidentiality: It’s common to include a confidentiality clause or refer back to an existing non-disclosure agreement (NDA).

6. Binding or Not Binding: This is where many people slip up. You should state clearly:

   “This letter is not intended to create any legally binding obligations except for clauses X, Y and Z.”

7. Costs: Specify who will bear the costs of negotiating and documenting the transaction – especially useful where significant legal or accountancy work is anticipated.

8. Termination: You may want the letter to expire on a certain date or after a period of inactivity.

9. Governing Law and Jurisdiction: Just in case a dispute does arise.

Letter of Intent vs Heads of Terms – What’s the Difference?

Although people often use the terms interchangeably, there is a meaningful difference between a Letter of Intent (LOI) and Heads of Terms (HOTs) – and understanding that difference can help avoid confusion during a deal.

A Letter of Intent is usually drafted and issued by the buyer. It sets out the buyer’s proposed offer and terms in principle. Think of it as a formal way for the buyer to say, “here’s what we’re willing to do, subject to contract.” It tends to be one-sided and focuses mainly on commercial terms from the buyer’s perspective, such as the price and structure of the deal, plus any exclusivity or due diligence periods.

By contrast, Heads of Terms are usually a jointly negotiated document. They go further than an LOI and often form the framework for the key elements that will appear in the final transaction documents. HOTs are where the parties start to get into more detail, including:

• The structure and timing of the price (e.g. completion accounts, earn-outs or deferred elements)

• Key restrictive covenants (such as non-compete or non-solicit clauses)

• Warranties and indemnities expected from the seller

• Tax-related provisions, such as tax covenants or retention amounts

In short:

• An LOI is typically buyer-led, indicative, and commercially focused.

• HOTs are collaboratively negotiated and closer to a legal skeleton of the final deal.

Both documents aim to clarify the main terms before drafting full contracts, but HOTs usually demand more careful legal input as they often shape the finer details of the share purchase agreement or asset purchase agreement.

Some Practical Tips

• Be clear and consistent: Don’t say one thing is non-binding in one clause, then imply it’s binding elsewhere.

• Watch your language: Words like “shall” and “will” can be interpreted as creating obligations. Prefer “intends to” or “expects to”.

• Do not assume it’s harmless: Courts have occasionally found that LOIs created binding contracts – especially where the conduct of the parties afterwards supported that.

Final Thoughts

An MOU or LOI can be a very useful document if done properly. But if you get it wrong, it could inadvertently create legal obligations you didn’t intend – or leave you exposed if the other party walks away.

So my advice is this: treat these documents with care. Always make clear what is binding and what is not. And don’t sign anything – even a “non-binding” letter – without taking legal advice. And for that, I’m here to help.