What is a Letter of Intent (LOI) in Quebec Commercial Deals?

A letter of intent (LOI) is a pre-contractual document often used in business deals. Other terms for it include a term sheet, heads of agreement, or letter of understanding. These LOIs are common in buying and selling businesses and in commercial leases.

​

What Is the Purpose of a Letter of Intent?

LOIs put the parties' preliminary agreement in writing, acting as a guide for a future binding contract. However, this does not guarantee that the contract will happen. Instead, the LOI helps both sides cost-effectively agree on key terms and fosters trust.

What Key Terms Are Included in an LOI?

A simple LOI will contain the basic terms of the future agreement, such as the price, the bargain, the method of acquisition, the financial terms, the due diligence and inspection timetable, and the date the parties will finalize the agreement to be executed. A more detailed LOI may further deal with the risks the purchaser will assume, and those that will remain with the seller.

Legal Effects: Is a Letter of Intent Binding?

The LOI's legal effects will depend on the intent of the parties. First, it can act as the final expression of the parties. In this case, the LOI becomes a complete and enforceable agreement governing the transaction. This occurs where the parties have settled the preliminary and essential terms. Second, the LOI may be partially enforceable, with both binding and non-binding clauses. The binding clauses of the LOI traditionally relate to the expense sharing, confidentiality, and exclusivity of negotiation. Third, the LOI can be non-binding, bearing no legal enforceability. The purpose of a non-binding LOI is to serve as a guide for the parties as they navigate through the negotiation process to conclude the transaction.

The Mandatory Duty of Good Faith in Quebec

(Art. 7 C.C.Q.)

Regardless of the intended legal effects of an LOI, the parties must act in good faith. In accordance with the rules in Quebec, no right may be exercised with the intent of injuring another or in an excessive and unreasonable manner, and therefore contrary to the requirements of good faith (art 7 C.C.Q.).

LOI vs. Final Contract: What Is the Best Strategy for Your Deal?

​Before putting the LOI into writing, all sides of the transaction should agree on its level of detail and its legal enforceability. In doing so, should the parties realize they are ready to move ahead with the underlying transaction, then that purpose is not best achieved by the LOI and the parties should move straight to the final agreement.

Planning a commercial purchase, sale, or lease? Contact our team today to ensure your Letter of Intent sets the right foundation for your deal.