Letter of Intent vs Term Sheet: What Is Binding (2026)

A letter of intent (LOI) and a term sheet both do the same basic job: they set out the main terms of a deal before the full contract is written. People use the names almost interchangeably, and in practice they overlap heavily. The question that actually matters is not which label you use, but which parts of the document are legally binding and which are not. Get that wrong and you can be locked into a deal you thought was still just a proposal. This is general information, not legal advice. Whether a document is binding depends on its wording and on local contract law, so confirm your position before signing. ## What each document is A letter of intent is usually written as a letter from one party to another, setting out the headline terms they intend to agree and the intention to proceed to a full contract. It is common in business acquisitions, commercial property, and large supply deals. A term sheet is usually a bullet-point summary of the key commercial terms, more like a table than a letter. It is the standard format in venture capital and investment deals, where the term sheet lists valuation, investment amount, share class, board seats, and investor protections. The form differs, the letter versus the list, but the function is the same: to capture the deal's shape quickly so both sides know they are aligned before spending money on full documentation and due diligence. A heads of agreement or memorandum of understanding is the same idea under a different name. ## The real question: binding or not Most of an LOI or term sheet is intended to be non-binding. The commercial terms, price, structure, timing, are a statement of current intention, not a promise, so either side can still walk away or renegotiate as due diligence reveals more. That is the whole point of doing a short document first. But almost every LOI or term sheet contains a few clauses that are meant to be binding straight away, even though the main deal is not. The typical binding clauses are: - Confidentiality: neither side may disclose the deal or the information shared.

• Exclusivity (or "no-shop"): the seller agrees not to talk to other buyers for a set period while the buyer does its work.
• Costs: each side bears its own costs, or a break fee applies.
• Governing law and dispute resolution for the LOI itself. A well-drafted document says explicitly which clauses bind and which do not, usually with a sentence like: "Except for the clauses on confidentiality, exclusivity, costs, and governing law, this document is not legally binding and no binding agreement arises until a definitive contract is signed." That one sentence prevents most disputes. ## How a document becomes binding by accident The danger is that a court can find a binding contract even where the parties did not intend one, if the language looks like a firm agreement and the key terms are all present. Phrases like "the parties agree" or "the buyer shall pay" read as commitments. In some jurisdictions there is also a duty to negotiate in good faith once you sign certain preliminary documents. The safest approach is to state clearly and early that the document is subject to contract and non-binding except for the named clauses, and to keep the commercial terms worded as intentions, not promises. ## What to include A useful LOI or term sheet usually covers: the parties; a short description of the deal and its structure; the key commercial terms (price, amount, timing, what is included); conditions to proceeding, such as due diligence, board approval, or financing; the binding clauses (confidentiality, exclusivity, costs); a clear statement of what is and is not binding; an expiry date; and signature blocks. ## Common mistakes to avoid - Not stating which clauses are binding, leaving the whole document ambiguous.
• Using firm, promise-like language for terms you meant as mere intentions.
• Granting a long exclusivity period that ties your hands if the deal stalls.
• Forgetting an expiry date, so a stale term sheet lingers.
• Treating the LOI as the deal and skimping on the definitive contract that follows.
• Sharing sensitive information before the confidentiality clause is in force. ## Keeping the preliminary and final documents connected An LOI or term sheet is the first in a chain: it feeds the definitive contract, and its binding confidentiality and exclusivity terms run on their own clocks. Teams often lose track of whether an exclusivity period is still live, or whether the final contract actually reflects the agreed heads of terms. Keeping the preliminary document, its binding dates, and the definitive contract linked in one place prevents both breaches and drift. Adira is an AI contract workspace that reads linked documents, tracks binding dates like exclusivity periods, and checks a final contract against the agreed terms in one place. More at its product page. The guidance above stands on its own. ## Bottom line A letter of intent and a term sheet are the same tool in different formats: a short document capturing a deal's main terms before the full contract. The commercial terms are usually non-binding, but clauses on confidentiality, exclusivity, and costs are meant to bind straight away. State plainly which parts bind and which do not, keep the commercial terms worded as intentions, and remember a court can find a binding contract from firm language even when you did not intend one. Because this turns on wording and local law, confirm your document with a qualified lawyer before signing.