A letter of agreement or LOA is a documented list of goods, space or services that are expected to be provided at agreed upon terms, prices and time. Once documented and signed by the parties involved, the agreement becomes a binding contract. Outlining the agreement between two or more parties, such documents may appear in the forms of Asset Purchase Agreements, Lease Agreement, Joint Venture Agreements which help to close all Agreements which are required to close a large financial deal.
To put it simply, a letter of agreement is needed when:
- To explain and clarify important points to both parties so they can conveniently understand the terms of a complex transaction.
- To formally establish that the parties involved are currently in the negotiation stage.
- To lay down buffers that will prevent a deal from nullifying during the negotiation phase.
- To state terms of payment when a third party is involved.
Since the LOA clarifies working arrangements between two parties, it is advisable to enlist the services of a lawyer so that there are no disagreements later on. It is not only important to remember to add all necessary details, terms and conditions to the letter of agreement, but it is equally important to state every details specifically, in black and white, so that there are no ambiguities. Lastly, it is essential to ensure that the LOA has a formal tone throughout. Since the LOA is legally binding as soon as it is signed, it is advisable for both parties to go through it with a fine toothed comb to make sure there are no ugly surprises later on.