Letter of intent

What it means

A letter of intent states in writing the intention to do a deal: what is being bought or agreed, on what main terms, and within what timeframe. Most of it is non-binding - it summarises the negotiation so far rather than contracting.

Some parts are almost always binding, though: confidentiality, exclusivity for a period, who bears costs, and governing law. That is why even a "non-binding" document goes past a lawyer.

A letter of intent should not be confused with an agreement to conclude a future contract under the Commercial Code. That one is binding: if it fixes the essential terms of the future contract, a party can demand that the contract be signed. A letter of intent has no such force unless its wording says otherwise.

How it works in practice

It is used before due diligence and before drafting the contract, often after an NDA is signed. In larger transactions a term sheet replaces or supplements it, being shorter and focused on commercial parameters.

On large projects and in tenders a similar document confirms interest ahead of a full bid: the parties fix the scope, an indicative price and the timing, so nobody spends months preparing an offer the buyer was never going to consider.

When buying a share in a small s. r. o., the letter often states that the price is based on the balance sheet at a given date and adjusted for net debt. As the accounting firm, we prepare the figures for that date so that buyer and seller do not end up arguing about numbers just before the contract is signed.

What to watch out for

Wording such as "the parties undertake to conclude the agreement" can turn a non-binding letter into a binding promise. So an explicit sentence always says which provisions bind and which do not - and what happens to any deposited funds if the deal does not happen.

Exclusivity without a clear end can lock the seller in for months: it may not talk to another buyer, and the buyer has no reason to hurry. Breaching it is also often backed by a contractual penalty. Exclusivity is therefore tied to a fixed date and lapses if the other side does not complete the agreed steps.