Is your letter of
intent binding?

By Jonathan Kleiman, Barrister & Solicitor · Published June 2026

A client forwards me a two-page document, usually with a relaxed note attached: "Just signing this letter of intent to get the ball rolling — nothing serious yet." That sentence makes me sit up, because "nothing serious" is precisely the assumption that gets people into trouble. A letter of intent — or term sheet — sits at the front of almost every business sale, investment, or major deal, and it occupies a strange middle ground: most of it is not meant to bind you, but parts of it usually are, and the whole thing can become a binding contract if it is drafted carelessly.

The honest answer to "is my letter of intent binding?" is the lawyer\'s favourite: it depends. It depends on the wording, and on what a court would say the parties objectively intended. The good news is that a well-drafted LOI removes most of the guesswork by stating plainly which clauses bind and which do not. The bad news is that a lot of LOIs I see do not do that, and the people signing them have no idea where the line falls.

Below I will walk through what an LOI actually is, why deals use them, which parts are usually binding versus not, and the trap of accidentally creating a contract you did not mean to make. None of this is legal advice on your specific deal — that requires looking at your actual document — but after years of papering Ontario business transactions, this is the framework I want every client to understand before they sign.

What a letter of intent or term sheet actually is

A letter of intent (LOI) — also commonly called a term sheet, and sometimes a memorandum of understanding — sets out the key proposed terms of a deal before the parties negotiate and sign the full, definitive agreement. In a business sale, that definitive agreement is usually a share or asset purchase agreement. The LOI is the short document that comes first.

What goes in it? The headline terms: the price (or how price will be determined), the structure of the deal, the major conditions, and a rough timeline. It is the deal in outline — enough detail to confirm both sides are talking about the same transaction, but far short of the dozens of pages of representations, warranties, covenants, and indemnities that a definitive agreement contains.

People sometimes ask whether "letter of intent" and "term sheet" mean different things. In practice the labels are used loosely and often interchangeably. A term sheet tends to be more of a bulleted list of terms; a letter of intent reads more like a letter. What matters is not the name on the document but what it says — and, as we will get to, that is exactly the point.

Why deals use an LOI in the first place

If most of an LOI is non-binding, you might reasonably ask why anyone bothers. The answer is that a good LOI does a surprising amount of useful work before anyone has spent serious money on lawyers and accountants.

It aligns the parties on the big terms early. Before you sink weeks into drafting, you want to know you and the other side actually agree on price and structure. Writing it down surfaces misunderstandings while they are cheap to fix.

It frames and scopes the due diligence. The LOI signals what the buyer is paying for and on what assumptions, which tells everyone what the investigation needs to confirm. It gives the diligence a shape.

It can lock in exclusivity. A buyer about to spend money investigating a business does not want the seller shopping the same deal around. An exclusivity or no-shop clause keeps the seller at the table for a defined window, so the buyer is not negotiating against a moving target.

It surfaces deal-breakers. Better to learn that the parties are miles apart on a key condition now, on page two, than after everyone has run up fees. The LOI is a cheap stress test for the deal.

It can support financing. A lender or investor often wants to see that a transaction is genuinely taking shape before they commit. A signed LOI is evidence the deal is real.

The big question — is it binding?

Here is the heart of it. An LOI is usually mostly non-binding as to the deal itself. The commercial terms — price, structure — are typically expressed as subject to a definitive agreement and subject to due diligence. That means either side can still walk away if the final deal is not reached or the diligence turns up problems. You are not, by signing the LOI, committing to complete the transaction.

But — and this is the part people miss — specific clauses in an LOI are usually intended to be binding, even before the definitive agreement is signed. And separately, whether something binds is ultimately a question of the parties\' objective intention and the wording, not the label on the page. So the real answer has two layers: which clauses are meant to bind, and whether the document, read as a whole, accidentally binds more than intended. Let me take each in turn.

So is the price binding or not?

Almost always not, when the LOI is drafted properly. The price and structure are the classic "subject to a definitive agreement" terms — they describe where the parties hope to land, not a firm commitment. If due diligence reveals the business is worth less than thought, the price can move or the deal can die. That flexibility is the whole reason the commercial terms are kept non-binding. If you genuinely want price to be locked, that is a very different document, and you should say so deliberately rather than let it happen by accident.

The parts that are usually NON-binding

The commercial heart of the deal is normally left open. That includes:

• Price — the purchase price, or the formula for calculating it, framed as a proposal that the definitive agreement will finalize.
• Deal structure — whether it is a share deal or an asset deal, what is included, how it is financed, and how it closes.
• Conditions — the major things that would have to be true for the deal to proceed, which the definitive agreement will spell out in detail.
• Timeline — target dates for diligence, signing, and closing, which are aspirational rather than enforceable.

The thread tying these together is the language of contingency: subject to a definitive agreement, subject to due diligence, subject to board approval, and so on. Those phrases are not filler. They are the words that keep the deal open and protect your right to walk away. Strip them out and you change the character of the document.

The parts that are usually BINDING

Now the clauses that are normally meant to bind from the moment the LOI is signed, regardless of whether the deal ever closes:

• Confidentiality. Both sides are about to share sensitive information — financials, customer lists, contracts. A confidentiality clause (or a separate NDA the LOI references) protects it, and it needs to bind immediately, not someday when a definitive agreement is signed.
• Exclusivity / no-shop. The promise not to negotiate the same deal with anyone else for a set period. This protects the party spending money on diligence and only works if it binds right away.
• Governing law. Which jurisdiction\'s law applies — Ontario, typically — and where disputes are resolved. You want certainty on this from the start.
• Costs. Who bears the cost of the process, and what happens to those costs if the deal falls through. Often each side bears its own, but it should be stated.
• Duty to negotiate in good faith. Some LOIs include an express obligation to work toward the definitive agreement in good faith. Where it appears and is drafted as binding, it can carry weight — but many LOIs deliberately omit it. You should know which kind you have signed.

A well-drafted LOI does not leave you guessing. It says, in plain terms, that these identified clauses are binding and the rest is not. That single piece of drafting hygiene resolves most of the uncertainty I see clients lose sleep over.

Is a confidentiality clause in an LOI enough, or do I need a separate NDA?

Either approach can work. Sometimes the confidentiality obligation lives inside the LOI as one of the binding clauses; sometimes the parties sign a standalone non-disclosure agreement first and the LOI simply refers to it. What matters is that the protection actually binds before sensitive information changes hands — not that it sits in one document rather than another. If you have already shared financials on a casual basis, that is a gap worth closing, and it is the kind of thing a contract lawyer will flag in a quick review.

The trap — accidentally creating a binding contract

This is the part that keeps me cautious, and the reason I never wave off an LOI as "just a formality." Whether a document is binding turns on the parties\' objective intention and the wording — not on the label "letter of intent." A document that is too definite, and that reads as though the parties meant to be bound, can be enforced as a contract even though it is titled "Letter of Intent" in bold at the top.

Ontario courts look at the language of the document and at the surrounding conduct of the parties. If your LOI nails down every essential term, uses committal language ("the buyer shall purchase"), and omits the contingency phrases, a court may well conclude you intended a binding deal — whatever you called it. The label does not save you. Conversely, a vaguely worded LOI that is missing essential terms might not bind anyone to anything, which can be its own problem if you were relying on it.

So the trap runs in both directions. A sloppy LOI can lock you in — or at least hand the other side an arguable case that it did, which is sometimes just as expensive to fight. And a sloppy LOI can also fail to protect you when you assumed it had. Both failures come from the same root cause: the document was not clear about what it intended to do. This is also why an LOI that drifts toward a binding commitment can expose you to a breach of contract claim you never saw coming.

What a well-drafted LOI should say — and the magic words

A good LOI is built to be unambiguous about its own legal effect. The single most important thing it does is expressly state which clauses bind and which do not. In practice, that usually looks like a clause near the end that says something to the effect of: apart from the identified binding provisions — confidentiality, exclusivity, governing law, costs, and any good-faith obligation — this letter creates no binding obligation to complete the transaction, and a binding agreement to do the deal arises only upon the parties signing a definitive agreement.

Those are the magic words, and they do a lot of work. They keep the commercial terms open. They confirm the protective clauses bind now. And they tell a court exactly what the parties intended, which is the very thing the court is trying to figure out. When that clause is present and clear, the question "is my LOI binding?" mostly answers itself.

A few other marks of a well-drafted LOI: it labels the binding clauses clearly rather than burying them; it uses the contingency language (subject to a definitive agreement, subject to due diligence) consistently on the commercial terms; it sets a sensible exclusivity period with a defined end; and it does not accidentally promise more than the parties mean. Getting this right is exactly where a business lawyer earns their fee on what looks, deceptively, like a simple document.

What an LOI is actually good for

Step back from the binding-or-not question and it is worth remembering why a properly drafted LOI is genuinely valuable. Used well, it:

• Aligns the parties on price, structure, and the shape of the deal before anyone spends heavily.
• Frames the due diligence, so the investigation has clear targets and assumptions to confirm.
• Locks in exclusivity, so a buyer can invest in diligence without the seller running a parallel process.
• Surfaces deal-breakers early, while they cost almost nothing to discover.
• Supports financing, by showing a lender or investor that the deal is real and progressing.

For a buyer, the LOI is often the first formal step in a disciplined acquisition process — the kind of process I walk through in the buying a business checklist. For a seller, it is the moment to make sure exclusivity is not longer than necessary and that the protective terms cut both ways.

LOI vs. the definitive agreement

It helps to see the two documents side by side, because they do different jobs.

The LOI is short, early, and mostly non-binding as to closing. Its job is to frame the deal and lock down a handful of protective terms. It gets the parties aligned and moving.

The definitive agreement — the share or asset purchase agreement — is long, fully negotiated, and binding. It contains the detailed representations and warranties, the covenants, the indemnities, the conditions to closing, and the mechanics of how money and ownership actually change hands. A binding obligation to complete the deal generally arises only when this document is signed.

In other words, the LOI is the map and the definitive agreement is the journey. People sometimes treat the LOI as the deal and the definitive agreement as paperwork; it is the other way around. The LOI points the way, but the real commitment lives in the definitive agreement — which is why the gap between the two is also where deals most often fall apart, and where good legal drafting matters most. If you are on the sell side, lining this up early is part of sound exit planning.

Common mistakes I see

Over the years, the same errors come up again and again with letters of intent. None of them is exotic, and each is avoidable.

Treating it as "nothing serious." The casual attitude is the root of most LOI problems. People sign without reading closely because the document looks friendly, and they miss that they are committing to binding exclusivity or confidentiality — or worse, that the whole thing reads as a contract.

No clause saying what binds. The most consequential omission. Without an express statement that only the identified clauses bind and the rest does not, you are leaving the most important question to a court\'s reading of intention. That is an avoidable gamble.

Making it too definite. An LOI that pins down every term in committal language and drops the contingency phrases can be argued into a binding deal. Definiteness is good in a definitive agreement; in an LOI, it can be a liability.

Ignoring the exclusivity terms. Sellers in particular sign up to a no-shop without noticing how long it runs or how hard it is to exit. A long, sticky exclusivity period can trap you in a deal that is going nowhere while better options pass by.

Sharing information before confidentiality binds. Handing over financials and customer data before the confidentiality protection is actually in force is a quiet but real risk, especially if the deal then collapses.

Assuming the label protects you. Writing "non-binding" or "letter of intent" at the top and assuming that settles it. It does not — the substance and conduct govern, not the heading.

Key takeaways

• An LOI is mostly non-binding as to the deal — but not entirely. Price and structure are usually "subject to a definitive agreement," so either side can walk; specific clauses are meant to bind right away.
• Confidentiality, exclusivity, governing law, and costs usually bind. Sometimes a duty to negotiate in good faith does too. A good LOI flags these as binding and says the rest is not.
• The label does not decide it. Binding turns on objective intention and wording, not the words "letter of intent" — a too-definite LOI can be enforced as a contract.
• The magic words matter. A well-drafted LOI expressly states that, apart from the identified binding clauses, there is no obligation to complete the deal until a definitive agreement is signed.
• Have it reviewed. An LOI looks simple, which is exactly why it gets signed carelessly — a short review is cheap next to being argued into a deal you never meant to make.

Frequently asked questions

What is a letter of intent (or term sheet)?

A letter of intent (LOI) — also called a term sheet — sets out the key proposed terms of a business deal before the parties negotiate and sign the full, definitive agreement, such as a share or asset purchase agreement. It typically captures the headline points: price, deal structure, major conditions, and the timeline. Think of it as a written handshake that frames where the parties think they are heading. It is usually not meant to be the final, fully binding contract for the deal itself, but it puts everyone on the same page before the lawyers and accountants get to work.

Is a letter of intent legally binding in Ontario?

Usually it is mostly non-binding as to the deal itself, but the answer is "it depends on the wording." The commercial terms — price and structure — are typically expressed as subject to a definitive agreement and subject to due diligence, meaning either side can still walk away. But whether a document binds turns on the parties' objective intention and the language used, not on the label "letter of intent." Specific clauses are usually intended to bind even before the final agreement. A well-drafted LOI says clearly which parts bind and which do not. If yours is vague, get it reviewed.

Which parts of an LOI are usually binding?

Even when the overall deal stays open, certain clauses in an LOI are normally meant to be binding right away. The common ones are confidentiality (protecting information shared during the deal), exclusivity or a no-shop (a promise not to negotiate with others for a set period), governing law, the allocation of costs, and sometimes a duty to negotiate in good faith. A carefully drafted LOI flags these as binding and states that everything else is not. The point is to lock down the protective terms early while keeping the commercial deal contingent on a definitive agreement and due diligence.

Can I accidentally create a binding contract with an LOI?

Yes — and this is the trap I worry about most. Whether something is enforceable turns on the parties' objective intention and the wording, not on what the document is called. A letter of intent that is too definite and reads as though the parties meant to be bound can be enforced as a contract, even with "letter of intent" at the top. Ontario courts look at the language and the surrounding conduct. So a sloppy LOI can lock you in, or at least give the other side an arguable case that it did. That is exactly why the binding-versus-non-binding language has to be explicit.

What does "subject to a definitive agreement" mean?

It is the phrase that keeps the commercial deal open. Saying the terms are "subject to a definitive agreement" signals that the parties do not intend to be bound to complete the transaction until they negotiate and sign the full, formal contract — the share or asset purchase agreement. Pair it with "subject to due diligence" and you preserve the right to walk away if the investigation turns up problems. These words matter because intention drives enforceability. A well-drafted LOI uses them to make clear that, apart from the identified binding clauses, no obligation to close the deal exists yet.

What is an exclusivity or no-shop clause?

An exclusivity clause — often called a no-shop — is a promise that, for a defined period, you will not negotiate the same deal with anyone else. In a purchase, the buyer usually wants it: they are about to spend real money on due diligence and lawyers, and they do not want the seller shopping their offer to drive up the price or run a parallel process. It is one of the clauses in an LOI that is usually intended to be binding even though the rest of the deal is not. A seller should watch the length of the exclusivity window and what triggers its end.

Do I have to negotiate in good faith after signing an LOI?

Sometimes — it depends on what the LOI says. Some LOIs include an express duty to negotiate the definitive agreement in good faith, and where that clause is drafted as binding, it can carry obligations. Others deliberately leave it out so either side can walk away freely. Because this is an area where wording and intention drive the outcome, you should know whether your LOI contains a good-faith clause and whether it is framed as binding. I would not assume one exists or does not based on the label. If it matters to your deal, it should be addressed expressly, and reviewed by a lawyer.

What's the difference between an LOI and the final purchase agreement?

The LOI is the short, early document that frames the deal — price, structure, conditions, timeline — and is usually mostly non-binding as to closing. The definitive agreement (a share or asset purchase agreement) is the long, fully negotiated contract that actually binds the parties to complete the transaction. It contains the detailed representations, warranties, covenants, indemnities, and closing mechanics that an LOI only gestures at. The LOI gets you aligned; the definitive agreement gets you closed. A binding obligation to do the deal generally arises only when that definitive agreement is signed.

Why bother with an LOI at all?

Because it does real work before anyone spends heavily on lawyers and accountants. An LOI aligns the parties on the big terms early, frames and scopes the due diligence, and can lock in exclusivity so you are not negotiating against a moving target. It surfaces deal-breakers — on price, structure, or key conditions — while they are cheap to discover rather than after weeks of expensive work. A signed LOI can also support financing, because a lender or investor wants to see that a deal is genuinely taking shape. Used well, it saves money and reduces the chance the deal blows up late.

Should a lawyer draft or review my LOI?

In my view, yes. An LOI looks simple, which is exactly why people sign them without thinking, and that is where the accidental-contract risk lives. A lawyer makes sure the binding clauses you actually want — confidentiality, exclusivity, governing law, costs — are clearly binding, and that the commercial terms are clearly not, by tying them to a definitive agreement and due diligence. The cost of a review is small next to the cost of being argued into a deal you did not mean to commit to, or losing a protection you assumed you had. For a document this consequential, a short review is cheap insurance.

Final thoughts

"Is my letter of intent binding?" is the right question to ask — and the fact that so many people do not ask it is exactly why I keep writing about it. The reassuring part is that a well-drafted LOI gives you a clear answer: the commercial deal stays open, tied to a definitive agreement and due diligence, while a short list of protective clauses binds from the start. The risk lives almost entirely in the documents that are not drafted that way — the casual, too-definite, or silent ones that leave the binding question to chance.

If you are about to sign an LOI or term sheet, the move that protects you is simple: be explicit about what binds and what does not, do not treat the document as trivial, and have someone read it before you sign. That applies whether you are buying a business or selling one — and it is doubly true if money or information is going to change hands on the strength of it. The same discipline carries through to the everyday service agreements a business signs; clarity about what is binding is the whole game.

If you want a quick, honest read on whether your letter of intent says what you think it says, call 416-554-1639 or book a free consultation. A short conversation can usually tell you where the binding line falls — and flag anything that should be fixed before you sign.