Letter of Intent in Business Acquisition and Real Estate Transactions

Key practical takeaways

A letter of intent can help a buyer and seller agree on the direction of a transaction before investing in inspections, financing, and detailed negotiations. Its main risk is uncertainty about what the signatures actually commit them to do.

In Quebec, calling a document a “letter of intent” or “non-binding” does not necessarily settle its legal effect. Its wording, the parties’ intentions, and the surrounding circumstances matter.

Before signing:

• Identify the buyer, seller, and assets or shares involved.
• State whether the proposed acquisition remains non-binding until a definitive agreement is signed.
• Identify separately any immediately binding commitments, such as confidentiality, exclusivity, information access, and payment of expenses.
• Set realistic deadlines for due diligence, financing, approvals, and negotiations.
• Explain how negotiations end, what happens to a deposit, and which obligations survive.

A well-prepared letter of intent should make the next stage predictable without creating commitments the parties do not understand.

What is a letter of intent used for?

A letter of intent records the main commercial assumptions behind a proposed transaction. In a business acquisition, it may outline the proposed price, transaction structure, financing, and investigation process. In a real estate transaction, it may identify the property, intended use, inspection requirements, and anticipated closing date.

It is particularly useful when important information remains unavailable. A buyer may be willing to discuss a price for a manufacturing business but need to verify its earnings, customer contracts, and environmental exposure before committing.

The document can also reveal disagreements early. A seller expecting cash at closing may discover that the buyer proposes instalments or a substantial payment dependent on future performance.

A letter of intent is generally optional. Its usefulness depends on whether a preliminary negotiation stage adds value.

Is a letter of intent legally binding in Quebec?

There is no universal answer. Three arrangements are common.

A non-binding description of the proposed deal

The parties record their current intentions while reserving the decision to proceed until they sign a definitive agreement.

This provides flexibility, but little certainty that the acquisition will happen. A proposed price or closing date may remain open to negotiation.

A preliminary document containing specific binding commitments

The acquisition itself remains non-binding, while identified commitments take effect immediately. These commonly address confidentiality, exclusivity, access to information, and expenses.

This arrangement requires careful separation of the commercial proposal from enforceable obligations. An introductory statement that “this letter is non-binding” can create confusion if later paragraphs impose immediate duties.

A binding promise or acquisition agreement

A document may establish an enforceable commitment where its substance shows agreement and an intention to be bound, even though a more detailed document is expected later.

The expectation of signing something “formal” does not always mean that nothing is binding beforehand. Conversely, recording a price and identifying property does not automatically resolve every question about contract formation.

The practical issue is whether the parties are reserving their consent or merely postponing the documentation of an agreement already reached.

Can a party withdraw from negotiations?

Where no binding obligation to complete the transaction exists, a party can generally decide not to proceed. Quebec’s duty of good faith nevertheless applies during negotiations.

A buyer should not conduct sham negotiations to obtain sensitive information. A seller should not deliberately mislead a buyer about material circumstances while encouraging costly work. Whether conduct is wrongful depends on the facts, including representations, reasonable reliance, and the stage reached.

Good faith does not guarantee a completed transaction or require acceptance of commercially unacceptable terms. Liability for wrongful negotiations also does not automatically entitle the disappointed party to the profits it expected from the acquisition. Fault, actual loss, and causation must be established.

A clear reservation of the right to withdraw helps define expectations, but does not authorize dishonest conduct.

What should a business acquisition letter of intent address?

What is being purchased?

An acquisition of shares differs fundamentally from an acquisition of business assets.

With a share purchase, the company ordinarily continues to own its assets and remains responsible for its obligations. The buyer acquires ownership of the company, including the economic exposure associated with its history.

With an asset purchase, the parties identify what transfers and which obligations the buyer agrees to assume. However, contractual allocation does not necessarily eliminate responsibilities imposed by law, including certain employment or environmental consequences.

Specify whether the transaction includes inventory, receivables, intellectual property, equipment, real estate, or only selected operations. Identify excluded assets as well.

How will the price be calculated?

A headline price can conceal major differences in expectations. Clarify:

• Whether debt, cash, and working capital affect the amount payable.
• How inventory will be valued.
• Whether part of the price is deferred or depends on future results.
• Whether financing by the seller is contemplated.
• Whether the price remains indicative pending verification.

These choices allocate risk. A future-performance payment can bridge a valuation gap, but may generate disputes about accounting methods and the buyer’s management of the business.

What must be investigated and approved?

The proposed investigation should match the business: financial records, taxes, employees, litigation, permits, major contracts, intellectual property, and security interests may all matter.

Identify required corporate approvals, third-party consents, and financing. A landlord’s consent to an assignment or a contractual change-of-control restriction can affect feasibility.

An obligation to pursue financing is different from a right to withdraw if specified financing cannot be obtained. The wording should reflect the intended arrangement.

What requires special attention in real estate transactions?

A commercial property’s value depends partly on whether it can legally and practically serve the buyer’s intended use.

The investigation may need to cover title, hypothecs and other registered rights, servitudes, the certificate of location, building condition, environmental risks, zoning, permits, leases, and operating expenses. A seller’s current use does not establish that a buyer’s proposed conversion is permitted.

An apartment building also raises questions about residential leases and tenant protections. Purchasing the property does not, by itself, allow the buyer to disregard existing occupants’ rights.

The letter should identify who provides documents, when the investigation period starts, what access is allowed, and who bears responsibility for damage caused by testing.

Is a letter of intent the same as a promise to purchase?

The title alone does not answer that question. An accepted promise to purchase can create a binding obligation before the deed of sale is signed.

A buyer should therefore avoid assuming that the notarial appointment is the first moment of commitment. Nor is there a general right to cancel every real estate purchase merely because the buyer changes their mind.

Residential transactions may involve mandatory brokerage forms and particular protections. A commercial letter of intent should not be reused automatically for a residential purchase.

How should due diligence, exclusivity, and deposits work?

Make the investigation period workable

A fixed deadline may be unsuitable if the seller has not delivered essential records. Consider whether time runs from signature, access to a document room, or receipt of specified information.

Explain the intended consequences of an unsatisfactory investigation: withdrawal, further negotiation, or another agreed response. A price reduction is not automatically available simply because a problem is discovered.

Deadlines and notice requirements matter. Silence should not be assumed to preserve a right to withdraw.

Limit exclusivity deliberately

Exclusivity gives the buyer time to investigate without competing negotiations. The seller loses market flexibility during that period.

Define its duration, the prohibited conduct, any reporting obligations concerning unsolicited approaches, and the conditions for an extension. Financing evidence or progress milestones may help balance the parties’ interests.

Explain the deposit separately

Specify who holds the money, whether it is credited toward the purchase price, and when it must be returned or may be retained.

Calling money a “deposit” does not, by itself, establish that it is automatically forfeited or that the buyer can abandon the transaction by surrendering it.

Does confidentiality permit unrestricted disclosure?

No. A confidentiality undertaking does not automatically authorize sharing employee files, customer information, or other personal information.

Quebec permits certain necessary disclosures for a qualifying commercial transaction without individual consent, subject to safeguards that include a prior written agreement restricting use and protecting confidentiality. If the transaction fails or the information is no longer needed for that purpose, destruction obligations apply.

Use staged disclosure, anonymized information where appropriate, and controlled access. Sharing information outside Quebec can trigger additional privacy requirements. The Quebec privacy regulator’s guidance explains the commercial transaction framework.

What if family ownership, incapacity, or an estate is involved?

The person negotiating may not have authority to bind every owner.

A shareholder does not personally own the company’s building. One co-owner generally cannot commit the others without authority. Family residence protections may also require attention to spousal consent.

When an owner has died, verify the liquidator’s powers and any necessary participation or authorization. An heir’s expected inheritance does not establish authority to sell.

Where an owner is represented because of incapacity, examine the applicable protection mandate, judgment, or tutorship arrangements. Additional authorization may be necessary before a significant disposition. Being the owner’s child or caregiver does not itself confer signing authority.

These issues should be investigated before promising a rapid closing.

What changes when another jurisdiction or language is involved?

Identify the intended governing law and dispute forum. A buyer’s address outside Quebec does not alone determine the applicable rules.

A choice of foreign law does not necessarily displace mandatory Quebec requirements concerning local property, privacy, or other regulated matters. Transactions involving foreign buyers may also require separate review of investment restrictions and approvals.

Language requirements deserve attention as well. Where a document is a contract of adhesion, French-language requirements can apply, including prior delivery of a French version before an express choice of another language, subject to applicable exceptions. A standard English template is not necessarily suitable merely because both businesses use English. The official language guidance explains this distinction.

Two examples of avoidable disputes

The business price that meant different things

A buyer and seller record a proposed price of $2 million. The buyer assumes normal working capital is included and debt will be repaid by the seller. The seller expects to retain receivables and leave debt in the company.

Both believe they have agreed on price. They have agreed only on a number.

Defining the pricing assumptions before extensive investigation can prevent wasted expense. Leaving them open preserves flexibility but increases uncertainty.

The property that cannot support the project

A buyer proposes acquiring a warehouse for food production. The investigation reveals that the intended use requires approvals that cannot be obtained within the planned schedule.

If the document preserves an effective right to withdraw on that basis, the buyer may have an agreed exit. If the buyer has already undertaken a binding purchase obligation without an appropriate condition, the discovery may not excuse performance.

The result turns on the actual commitment, the condition’s wording, and compliance with its requirements.

Make the preliminary stage serve the transaction

The strongest letter of intent answers three questions: what is being explored, what is binding now, and what must happen before either party must complete the acquisition.

Clear transaction scope, workable investigation periods, verified signing authority, and explicit exit arrangements reduce avoidable disputes. Breaching an enforceable commitment can lead to damages and, where legally available and appropriate, proceedings seeking performance. Precision at the preliminary stage therefore has consequences well beyond drafting convenience.

This text is provided for legal information purposes only. If you have a specific question regarding your personal situation, please contact a lawyer.

Allen Madelin Avocats offer consultations both in person and via videoconference. The first consultation is offered for $125.For more information, please contact us by telephone: 1 514 904 4017 or by e-mail: [email protected].