- Whether a letter of intent binds you depends on its wording and on which terms it actually fixes, not on its title.
- A clause that leaves a key term to be discussed may create nothing more than a duty to negotiate in good faith.
- Exclusivity, confidentiality and cost-sharing clauses are the parts most often meant to bind, so read them closely.
- Have a lawyer review a letter of intent before you sign, because backing out later can be harder than you expect.
A letter of intent, often called an LOI, is a short document that sets out the main terms on which a buyer and seller plan to do a deal. It usually comes after early talks and before the long purchase agreement is drafted. Many people sign one casually because it looks like a formality.
That can be a mistake. Some parts of an LOI may be legally binding, others may be only a statement of hopes, and the line between them is not always clear. This article explains how to think about that line, what to watch for in exclusivity clauses, and what to consider if you want to step away.
What a letter of intent does
An LOI is meant to record the deal's shape: the price, how it is paid, what is being bought, the timeline for due diligence and the conditions to closing. It lets both sides confirm they are on the same page before spending money on lawyers, accountants and investigations.
How the wording applies to your situation depends on the document and the circumstances, so it is worth confirming with a lawyer.
Which terms usually bind and which usually do not
Many LOIs are drafted so that the commercial terms, such as price and structure, are not final until a definitive agreement is signed, while a few procedural promises are intended to bind right away. The table shows how this commonly works, but the wording of your document controls.
| Type of term | How it is often treated |
|---|---|
| Price, payment terms and structure | Often stated to be subject to a definitive agreement, so they may not be fully binding. This depends on the wording. |
| Exclusivity or no-shop | Often intended to bind, for a stated period. |
| Confidentiality | Often intended to bind, even if the deal does not proceed. |
| Costs and expenses | Often stated to be each side's own responsibility, or shared in a set way. |
| Terms left to be discussed | May create no more than a duty to negotiate in good faith. |
On that last point, the Ontario Court of Appeal has accepted that a clause leaving a key term to be discussed creates no enforceable obligation beyond a duty to negotiate in good faith, and it upheld a finding that the party in that case had negotiated in good faith. In plain words, an open term is hard to enforce as a promise, but you are still expected to deal honestly in the negotiation.
There is more case law on when parties intend to be bound and how certain a term must be. How it applies to your LOI depends on its exact words and the surrounding conduct, so this is a good moment to ask a lawyer.
Exclusivity clauses: what to check
An exclusivity clause, sometimes called a no-shop, stops the seller from talking to other buyers for a set period while the buyer completes due diligence. It protects the buyer's investment of time and money. For a seller, it can be costly if the buyer is slow or loses interest, since your other options may disappear.
- Length: confirm the exact start and end dates, and whether the period can be extended automatically.
- Scope: check whether it bars only active sales talks or also bars answering inbound offers and sharing information.
- Conditions: see whether the buyer must meet milestones, such as providing financing proof, for exclusivity to continue.
- Exit rights: look for what happens if the buyer changes the price or terms during due diligence.
- Consequences: find out whether breaching the clause leads to a claim for costs or damages, and how those are set.
- Buyer-side limits: if you are the buyer, check whether you are also restricted from approaching the seller's customers, employees or suppliers.
Can you back out of a letter of intent?
The answer depends on what you signed and why you want out. Whether you can walk away from the purchase without a claim depends on the exact wording of the LOI and the facts, so it is worth confirming with a lawyer before you act. Where a key term was left open to be discussed, you are still expected to negotiate in good faith.
Problems arise when someone leaves quietly with no explanation, uses talks only to gather information, or ends the talks for a reason the LOI treats as a breach. Where the LOI sets out conditions, such as satisfactory due diligence or financing, make sure you can point to the condition that was not met.
- Reread the whole LOI, including any clause about termination, expiry and survival of obligations.
- Check whether any deposit or expense reimbursement is involved.
- Give written notice in the way the document requires, if it sets out a method.
- Avoid blaming the other side in writing before you get advice.
- Keep protecting their confidential information after the talks end.
What to do next
The best time to deal with these issues is before you sign. Once you have signed, your options narrow.
- Read the LOI from start to finish and mark each clause as binding, non-binding or unclear.
- Ask for a clear statement of which sections bind and which do not.
- Replace vague phrases such as terms to be discussed with specific terms, or clearly label them as open.
- Negotiate the length and conditions of any exclusivity period.
- Raise tax points early, such as whether the parties will make the joint GST/HST election on Form GST44 for the sale of a business.
- Have a lawyer review the LOI before you sign, or promptly if you have already signed and have concerns.
Frequently asked questions
Is a letter of intent legally binding in Ontario?
It depends on the wording and on which terms the document actually fixes. How this applies to your document depends on its terms, so it is worth confirming with a lawyer.
What if the LOI says terms will be discussed later?
A clause that leaves a key term to be discussed may create no enforceable obligation beyond a duty to negotiate in good faith. That means you may not be able to force a specific outcome, but you are still expected to negotiate honestly.
Can a seller talk to other buyers during exclusivity?
That depends on the exclusivity clause in your LOI, including its length and scope. Read it closely and ask a lawyer if you are unsure.
Should a lawyer review an LOI before I sign?
Yes, it is worth doing. An LOI is short, but it can lock in exclusivity, costs and confidentiality and set the framework for the rest of the deal. A lawyer can tell you which parts are likely to bind and suggest clearer wording.
Sources
- CRA - GST44 form page — canada.ca
- Court of Appeal for Ontario - Narwhal International Limited v. Teda International Realty Inc., 2021 ONCA 659 — ontariocourts.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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