A letter of intent (LOI) is a short written document that sets out the main terms two parties expect to agree on before they sign a final contract, used most often when someone buys or sells a business or leases commercial space in Ontario. It is usually meant as a starting point rather than a finished deal, but parts of an LOI, and sometimes the whole document, can be enforced in an Ontario court, so the wording matters far more than the label at the top of the page.
That gap between what people assume an LOI does and what it can actually do is where deals go wrong. This guide explains what belongs in a letter of intent, which clauses tend to bind you even when the rest does not, how Ontario courts have treated these documents, and the mistakes we see clients make before they call us.
What is a letter of intent
A letter of intent records the key terms of a proposed deal in writing so both sides know what they are working toward before they spend money on lawyers, accountants, and due diligence. Think of it as a written handshake. It names the parties, describes what is being bought or leased, sets out the price or rent, and lists the main conditions, then leaves the detailed contract for later.
In our practice we see LOIs most often in four situations. They appear when a client is buying or selling a business, when a tenant and landlord are negotiating a commercial lease, when partners are setting up a joint venture, and when a franchisor and a prospective franchisee start talking. The same document goes by other names too, such as a term sheet, a memorandum of understanding, or heads of terms. The name does not change how a court treats it.
A good LOI does three things. It confirms that both sides are serious, it gives the negotiation a structure, and it brings deal breakers to the surface early, while walking away still costs nothing.
Is a letter of intent legally binding in Ontario
It depends, and that honest answer is the whole point of reading the document carefully. A letter of intent can be fully binding, partly binding, or not binding at all. What decides the question is not the title but the words you use and how both sides behave after signing.
Ontario courts read the document as a whole and ask whether the parties intended to be bound. The leading case is Wallace v. Allen, a 2009 decision of the Court of Appeal for Ontario. Two parties signed an LOI for the sale of a business. When the deal fell apart before the formal share purchase agreement was signed, the seller argued the LOI was only an agreement to agree. The court disagreed. It found a binding contract because the document used the language of a contract, with phrases such as “it is agreed” and “this agreement,” and because the parties acted as though a deal was done. The seller had announced his retirement and introduced the buyer to staff as the new owner, and the buyer had started working in the business.
The contrast is an older Court of Appeal case, Bawitko Investments Ltd. v. Kernels Popcorn Ltd. There the court confirmed a basic rule. If parties genuinely do not intend to be bound until they sign a formal contract, there is no contract until that happens, and a bare promise to negotiate a future deal is not enforceable on its own. The line between the two outcomes is intention, judged by what a reasonable outside observer would conclude from the document and the conduct.
Two practical points follow. First, adding the words “subject to a formal agreement” helps, but it does not by itself make an LOI nonbinding if your wording and your behaviour point the other way. Second, Canadian law does not impose a general duty to negotiate in good faith, so you can usually walk away from talks. Once any part of the LOI is itself a binding agreement, though, the Supreme Court of Canada decision in Bhasin v. Hrynew requires you to perform that part honestly and not mislead the other side about it.
Clients are often surprised to learn that a letter of intent they signed to keep things moving had already locked them in. In Ontario the label on the page does not decide. The wording does.
Demet Altunbulakli, Founding Lawyer, Insight Law Professional Corporation
What this means for commercial leases and real estate
Real estate adds an extra wrinkle that catches people out. Under Ontario’s Statute of Frauds, an agreement that creates an interest in land has to be in writing and signed to be enforceable. A signed offer to lease or an LOI for commercial premises that already contains the essential terms, such as the parties, the property, the rent, and the term, can therefore amount to a binding lease commitment even though everyone called it a preliminary document. Ontario courts have also enforced unwritten land deals where one side relied on the agreement and started performing it, under a principle called part performance. The takeaway is simple. Treat a real estate LOI with the same care as the lease or purchase agreement itself, and have your commercial real estate lawyer look at it before you sign.
Which parts of a letter of intent usually bind you
Most LOIs are a mix. The commercial terms are normally left open, while a handful of protective clauses are written to bind both sides from the moment of signing. Knowing which is which keeps you from arguing about it later.
| Clause | Usual treatment | Why it matters |
|---|---|---|
| Purchase price or rent | Not binding | Stays open until the final agreement so both sides can adjust after due diligence |
| Deal structure (assets or shares) | Not binding | A starting position that often changes for tax and liability reasons |
| Confidentiality | Binding | Protects financial records, customer lists, and trade secrets shared during talks |
| Exclusivity | Binding | Stops the seller or landlord from shopping the deal for a set period |
| Deposit or good faith payment | Binding | Sets out how much is paid, who holds it, and when it is returned |
| Costs and expenses | Binding | Says who pays advisor fees if the deal does not close |
| Governing law | Binding | Confirms Ontario law applies and avoids a fight over jurisdiction |
| Expiry date | Binding | Ends the LOI automatically if no final agreement is reached in time |
The protective clauses earn their place. A confidentiality clause means the other side cannot use what they learned about your business if the deal collapses. You can read more in our guide to non-disclosure agreements in Ontario. An exclusivity clause, sometimes called a no shop clause, gives a buyer breathing room to spend on due diligence without worrying that the seller is taking other offers.
What goes into a strong letter of intent
A useful LOI is specific enough to be worth signing and clear enough that no one can later claim they misunderstood it. At a minimum we make sure these elements are covered.
- The parties. Full legal names of the buyer and seller, or tenant and landlord, and the entity that will actually sign.
- What is being bought or leased. A plain description of the business, assets, shares, or premises, including what is in and what is left out.
- Price or rent and how it is paid. The proposed figure, the deposit, and any amount tied to future performance.
- Conditions. The things that must happen before closing, such as satisfactory due diligence, financing, or landlord consent.
- Binding and nonbinding clauses, clearly labelled. A short statement saying which parts bind the parties and which do not.
- Confidentiality and exclusivity. The protective terms, with time limits.
- A timeline. Target dates for due diligence, the final agreement, and closing.
- An expiry date. A point at which the LOI lapses if the parties have not moved forward.
- Governing law. A line confirming the LOI is governed by Ontario law.
That structure is also a negotiating tool. Once the basics are on paper, the lawyers can focus on the detailed agreement instead of reopening price and timing. If you are buying a company, our guide on how to buy a business in Ontario walks through the stages that follow the LOI.
How we handle letters of intent at our firm
Whether you are sending an LOI or have just received one, the work follows a similar path.
- Intake and goals. We start with a short call to understand the deal, your priorities, and the point at which you would walk away.
- Review or first draft. We either review the LOI with you and mark the clauses that carry risk, or draft one from your terms.
- Clause by clause explanation. We tell you in plain language which parts would bind you, which stay open, and where the wording exposes you.
- Negotiation support. We suggest revisions and, if you want, deal directly with the other side or their lawyer.
- Handover to the main agreement. Once the LOI is signed we move into due diligence and the definitive agreement, carrying the agreed terms forward.
We bill LOI work in one of two ways. For a standalone letter of intent we usually quote a fixed fee, so you know the cost before we start. Where the LOI is the first step in a purchase or lease we are handling end to end, the cost is folded into the transaction retainer. We offer in person and virtual meetings, and we work with clients in English, French, and Turkish.
Common mistakes we see, and what they cost
Most LOI problems trace back to a few avoidable errors. Here are the ones we see most, and the price of getting them wrong.
- Treating the LOI as just a formality. You sign quickly, behave as though the deal is done, and find a court treats the LOI as binding, which is close to what happened in Wallace v. Allen.
- Leaving binding and nonbinding parts unclear. The parties end up in a dispute over which terms must be honoured, and the legal bill to sort it out can dwarf the value of the clause in question.
- Skipping the confidentiality clause. A competitor who walked away from the deal keeps your financials and customer list with nothing to stop them using it.
- No exclusivity or expiry date. You spend on due diligence while the seller quietly entertains a higher offer, or an open ended LOI hangs over the deal for months.
- Vague language. Words like intends to and may create arguments about what was actually promised.
- Forgetting the real estate writing rule. A signed offer to lease with all the essential terms can bind you to the premises before you meant to commit.
How an LOI differs from a term sheet, an MOU, and the final agreement
These documents sit on a spectrum from informal to binding. The names overlap in practice, so what counts is the content, not the heading.
| Document | What it is | Typical binding effect |
|---|---|---|
| Term sheet | A short, point form summary of the main commercial terms, common in financing and investment | Usually not binding, except for confidentiality and exclusivity |
| Memorandum of understanding (MOU) | A statement that the parties intend to work together, often used for partnerships and joint ventures | Usually not binding, but can bind if worded like a contract |
| Letter of intent (LOI) | A short letter setting out proposed deal terms before the formal contract | Mostly not binding, with binding protective clauses |
| Definitive agreement (purchase agreement or lease) | The detailed, signed contract that closes the deal | Fully binding, with representations, warranties, and indemnities |
The move from LOI to definitive agreement happens once due diligence is done and the parties are ready to commit. The price, payment terms, and key conditions carry over, and the final agreement adds the detailed protections. If your deal involves a company, our note on the difference between a share sale and an asset sale explains a choice the LOI often raises.
When should you use a letter of intent
An LOI is worth the effort when a deal is large enough or complex enough that both sides want comfort before they invest in it. It suits business purchases, mergers, commercial leases, and joint ventures, where there is a real gap between first interest and a signed contract.
It is less useful for small, simple transactions that can go straight to a short agreement, where adding an LOI only slows things down. If you are not sure whether your deal needs one, that is a five minute conversation worth having before you sign anything.
Frequently asked questions about letters of intent
Is a letter of intent legally binding in Ontario
Sometimes. An LOI can be fully binding, partly binding, or not binding, depending on the words used and how the parties act. Most are written so the commercial terms stay open while clauses like confidentiality and exclusivity bind immediately. Ontario courts look at the whole document and the parties’ conduct, not just the heading, so the safest course is to state plainly which parts bind you.
Can you walk away from a letter of intent
Usually yes, if the LOI is drafted to be nonbinding and you have not acted as though the deal is closed. Canadian law does not force parties to keep negotiating. The risk is that a binding clause, such as exclusivity or a deposit term, still applies, or that your conduct has turned a preliminary document into an enforceable contract. Have the wording checked before you rely on being able to leave.
What happens if the other side breaks a binding clause
You can pursue the usual contract remedies, most often damages for the loss the breach caused. In Wallace v. Allen the Court of Appeal awarded the buyer damages rather than ordering the sale to go through, because money was an adequate remedy on those facts. The remedy depends on the situation, which is why it helps to know in advance which clauses are enforceable.
Does an LOI need to be notarized or filed anywhere
No. A letter of intent is a private document between the parties. It is not filed with any court or government office in Ontario, and it does not need a notary to be effective. What matters is that the right people sign it and that the wording reflects what you actually intend.
Should the buyer or the seller prepare the letter of intent
Either can. In a business sale the buyer often drafts it after deciding to make an offer, since the buyer usually wants exclusivity and confidentiality. In a commercial lease the landlord or the landlord’s agent frequently sends an offer to lease first. Whoever drafts it sets the starting terms, which is an advantage, so the other side should have it reviewed before signing.
How long should a letter of intent stay open
Long enough to complete due diligence and negotiate the final agreement, and no longer. Many LOIs run for a set window, after which they expire unless the parties extend them. A clear expiry date protects both sides. The buyer is not left waiting without an answer, and the seller is not tied up while better offers pass by.
The information provided above is of a general nature and should not be considered legal advice. Every transaction or circumstance is unique, and obtaining specific legal advice is necessary to address your particular requirements. Therefore, if you have any legal questions, it is recommended that you consult with a lawyer.
