What letter of intent means
A letter of intent records what one party proposes, before the definitive agreement exists.
It is typically sent by a buyer to a seller, or by an investor to a company, setting out the price, the structure, the conditions and the timetable on which they would proceed.
The usual intention is that it does not bind either party to the transaction. It moves the negotiation forward, gives each side something concrete to work from, and allows a buyer to justify the cost of due diligence.
Certain clauses are meant to bind, and they are the ones that matter: confidentiality, exclusivity for a period, an agreement that each side bears its own costs, and how the letter comes to an end.
Whether the letter binds depends on its wording rather than its title. A letter of intent containing definite obligations, with nothing excluding legal relations, can be a contract, and Nigerian courts look at what the document says rather than what it is called.
How it is used
You meet letters of intent in two Nigerian settings above all.
Property. A buyer sends a letter of intent for a plot or a building, setting out the price, the deposit, the searches to be conducted, the condition about title and the timetable to completion. It gives the seller comfort that the buyer is serious and gives the buyer a period to investigate.
Business transactions. An acquirer or investor sets out the proposed price or valuation, the structure, the conditions including due diligence and regulatory approvals, and asks for exclusivity while it does the work.
A well drafted letter states plainly which parts bind and which do not. The commercial terms are expressed as subject to contract and not legally binding. Confidentiality, exclusivity, costs and governing law are expressed as binding.
It should also carry an expiry date. A letter of intent with no end leaves an exclusivity obligation running indefinitely, and a seller who signed one two years ago may still be technically restricted.
Key features
- Sets out proposed terms before the definitive agreement
- Usually intended not to bind the parties to the transaction
- Confidentiality, exclusivity and costs clauses are normally binding
- Should state expressly which parts bind and which do not
- Should carry an expiry date
- Wording rather than the title determines its effect
How this works in Nigeria
The property version deserves particular attention because of how Nigerian purchases actually proceed.
A buyer identifies a plot, pays a commitment fee to take it off the market, and begins searches. The letter of intent is where that arrangement should be recorded: what the payment is, what it secures, how long the exclusivity lasts, and expressly that it is refundable if the searches disclose a defect in title.
Without that, the buyer who withdraws after a bad search is arguing about a refund with a seller who has no reason to hurry.
The second Nigerian point is drifting into a contract. A letter of intent that specifies the property, the price, the parties and the completion date, and that is signed by both, may be a binding agreement for sale whatever the heading says. Where the parties intend to negotiate a deed of assignment afterwards, the letter should say expressly that the commercial terms are subject to contract.
The third is exclusivity. A seller granting exclusivity is agreeing not to deal with anybody else, which has a real cost in a moving market. Keep the period short, tie it to the buyer progressing, and provide that it ends if the buyer does not.
And for investment transactions, exclusivity granted to an investor conducting due diligence is where Nigerian founders lose runway. Ninety days is a long time in a company burning cash, and the period should be matched to the work rather than to what the investor requested.
Letter of intent vs memorandum of understanding vs term sheet
Three pre contract documents that do much the same job with different conventions.
A letter of intent is usually sent by one party to the other, setting out the terms on which they would proceed. It is the common form in property purchases and acquisitions.
A memorandum of understanding is usually signed by both parties, recording what they have agreed in principle. It is common between organisations and in the public sector.
A term sheet is the investment convention. It sets out the economic and control terms of a proposed financing in a structured format, and it is the document a founder negotiates before the long form documents are drafted.
All three are normally non binding as to the commercial terms and binding as to confidentiality, exclusivity and costs. What decides their effect is the wording, not the label, so the same care is required whichever heading is used.
Limits and risks
A non binding letter provides no security. A party who spends months and real money in reliance on it, and is then dropped, generally has no claim for the value of the deal.
It can also create false comfort, with parties beginning to perform on the strength of a document that expressly binds nobody.
Drafted too precisely, it risks becoming the contract, binding a party who thought they were still negotiating.
And exclusivity granted without a time limit or a progress condition can restrict a seller long after the buyer has lost interest.
Worth knowing
Say expressly in the letter that the commercial terms are subject to contract and not legally binding, and give the exclusivity an end date. Nigerian letters of intent for property become binding agreements for sale by accident, because they named the parties, the property, the price and the date.
Questions people ask
What is a letter of intent?
A document setting out the terms on which a party proposes to do a transaction, before the definitive agreement is drafted. It is common in property purchases and business acquisitions.
Is a letter of intent binding?
Usually not as to the commercial terms, provided it says so. Confidentiality, exclusivity and costs clauses are normally expressed as binding, and the wording rather than the title decides the effect.
Can I accidentally create a contract?
Yes. A letter naming the parties, the property, the price and a completion date, signed by both sides with nothing excluding legal relations, can be a binding agreement whatever the heading says.
What should a property letter of intent cover?
The price and deposit, what any commitment fee secures and whether it is refundable if searches disclose a defect, the searches to be conducted, the timetable, the exclusivity period, and that the commercial terms are subject to contract.
How long should exclusivity last?
Short, and tied to the buyer or investor actually progressing. It should have an end date and should terminate if the other side stops moving, because it restricts the seller in the meantime.
How does it differ from an MOU or a term sheet?
Mainly by convention. A letter of intent is sent by one party, an MOU is signed by both, and a term sheet is the investment format. All three are usually non binding on commercial terms and binding on confidentiality and exclusivity.