Letter of intent:
what binds the seller

Is a letter of intent legally binding?

Is a letter of intent a preliminary contract (avant-contrat)?

A partial contract, not a preliminary contract. The letter of intent belongs to no statutory category. It is neither an undertaking to sell (promesse de vente) nor a mere preparatory document devoid of legal effect. It is a set of heterogeneous clauses, some of which create immediately enforceable obligations while the others express no more than a revocable intention. That heterogeneity is its very purpose: it allows the framework of the negotiation to be fixed without fixing the transaction.

Why does the tense of the verb determine the scope of each clause?

The verb determines the commitment. The chambre commerciale (the commercial division of the Cour de cassation, the French supreme court for civil and commercial matters) and the cours d'appel (French courts of appeal) reason clause by clause, looking closely at the wording used. The Cour d'appel de Versailles, in a judgment of 24 June 2025 (no. 23/08513), distinguishes, according to the drafting, between an obligation de moyens (a best-efforts obligation) and an obligation de résultat (an obligation to achieve a given result). The Cour d'appel de Bordeaux, on 16 December 2025 (no. 24/00840), held that the use of the verb "garantir" (to guarantee) carries a binding commitment, whatever label the parties gave to their document. Writing "the purchaser shall guarantee the financing" and writing "the purchaser intends to seek financing" do not produce the same effects.

Does the title of the document protect the seller?

The title does not protect. Calling a document a "letter of intent", a "term sheet" or a "memorandum of understanding" neutralises no obligation. A letter of intent which fixes the subject matter and the price, and by which the seller undertakes to sell, may be recharacterised as a promesse unilatérale de vente (a unilateral undertaking to sell), with the consequences of article 1124 of the French Civil Code: the promisor's withdrawal during the option period does not prevent the promised contract from being formed, as the Cour de cassation held on 15 March 2023 (no. 21-20.399). The risk is not theoretical: it turns a framing document into an undertaking to sell enforceable by specific performance.

How should the non-binding clause be drafted?

The non-binding clause must be drafted. A closing clause stating that the document carries no obligation to conclude, that no agreement will arise before the sale and purchase agreement is signed and that only those provisions expressly designated as binding bind the parties is the seller's first protection. It must list the binding clauses by name rather than refer to an abstract category.

What becomes binding as soon as the letter of intent is signed?

Which obligations arise as soon as it is signed?

Three obligations arise immediately. Whatever drafting is adopted, they take effect as soon as the letter of intent is signed.

1. Exclusivity, which arises from an express provision and prevents the seller from pursuing any discussion with a third party for the agreed period.
2. Confidentiality, which also arises from an express provision and covers the financial data, the material contracts and the know-how disclosed.
3. Good faith in the negotiation, which applies automatically under article 1104 of the French Civil Code, which requires the parties to negotiate in good faith, and under article 1112 of the French Civil Code, which governs the opening and the breaking off of negotiations.

Does the confidentiality undertaking survive the failure of the negotiations?

Confidentiality survives failure. The undertaking not to disclose the financial data, the material contracts, the customer list and the know-how continues after the negotiations are broken off. Its scope is a matter for negotiation: the Cour d'appel de Rennes (court of appeal), on 27 January 2026 (no. 25/00525), accepted the contractual extension of the circle of authorised recipients, which means naming the advisers, funders and co-investors individually. The burden of proving disclosure, on the other hand, lies with the claimant, as the Cour d'appel d'Orléans pointed out on 18 September 2025 (no. 23/01684): communications must therefore be time-stamped and access to the data room logged.

What does a party who breaches confidentiality face?

Breach carries a real sanction. The Cour d'appel de Bordeaux, on 20 April 2026 (no. 22/03314), awarded 100,000 euros in damages for the combined breach of a confidentiality undertaking and of a non-solicitation clause. Adding a non-solicitation clause covering staff and customers, separate from confidentiality, is a drafting reflex that too many letters of intent leave out.

May the seller withhold decisive information?

The pre-contractual duty to inform is a matter of public policy. Article 1112-1 of the French Civil Code requires a party who knows information that is decisive for the other party's consent to disclose it. The seller cannot escape it by way of a clause. Intentionally concealing major litigation, a customer dependency or the loss of a licence amounts to fraudulent misrepresentation (dol) within the meaning of article 1137 of the French Civil Code, which opens the way to the annulment of the sale or to damages, independently of the seller's non-compete clause and of the warranty and indemnity agreement negotiated later.

Is the price stated in the letter of intent final?

Is the price set out in the letter of intent binding?

The price is indicative by design. It rests on the information provided before the audit, usually an information memorandum and three financial years of accounts. The wording must be explicit: an indicative price, non-binding, established on the basis of the information disclosed and subject to the findings of the due diligence. Failing that, the buyer who seeks to revise it after due diligence comes up against a seller who invokes the word given, and the negotiation sours at the worst possible moment.

Which valuation method should be stated?

The method matters more than the figure. Stating an EBITDA multiple (excédent brut d'exploitation), a discounted cash flow or an asset-based approach, together with the aggregate used and the reference financial year, makes it possible to discuss an adjustment based on parameters rather than to haggle. A price expressed as an enterprise value must set out the mechanism for moving to the value of the shares: available cash, net financial debt, normalised working capital requirement.

Should the earn-out be provided for as early as the letter of intent?

Earn-out consideration is prepared here. Where the valuation depends on future performance, the letter of intent must already lay down the principle of earn-out consideration (complément de prix), its basis, its time horizon and the fact that its calculation method will be settled in the sale and purchase agreement. An earn-out clause improvised at the end of the negotiation produces disputes over its implementation, for want of having defined the aggregate, the applicable accounting rules and the management undertakings during the observation period.

Which elements of the scope must be named?

The scope must be described. Five items call for an express mention, because whatever is not named in the letter of intent will be discussed later, with a weakened bargaining position for the party who discovers the exclusion.

1. Operating real estate, depending on whether it is sold with the shares, retained by the seller or leased to the operating company.
2. Subsidiaries and shareholdings, distinguishing those that fall within the scope from those that must leave it before completion of the transaction.
3. Trade marks and intellectual property rights held by the director in a personal capacity, whose transfer to the company must be organised and valued.
4. Shareholder current accounts, stating whether they are repaid, waived or bought out by the buyer in addition to the price of the shares.
5. Intuitu personae contracts, leases, licences and contracts whose continuation requires the express consent of the counterparty.

How long should exclusivity be granted to the buyer?

Why does the buyer require exclusivity?

Exclusivity is the price of due diligence. A buyer who commissions financial, legal, tax and employment due diligence bears fees ranging from a few thousand euros for an SME to several tens of thousands for a structured transaction. In return, it requires the seller to stop all discussions with third parties. The seller, for his part, ties up the asset: every week of exclusivity is a week during which he cannot take up a higher offer.

What length of exclusivity should be chosen?

The period is calibrated on the due diligence, not on habit. Market practice commonly adopts 30 to 90 days. A period of 45 to 60 days suits a single-site SME whose accounts are kept by an expert-comptable (French chartered accountant). A multi-entity group with real estate, pending litigation and environmental issues justifies 90 days. Setting too short a period does not favour the seller: it leads to a request for an extension made from a position of weakness, once the buyer is the only one left in the running.

Should the exclusivity have a calendar end date?

The end date must be fixed. Exclusivity with no precise end date, or which is extended automatically, is exposed to recharacterisation as a perpetual undertaking and loses its effectiveness. The drafting must state a calendar date, the starting point adopted and what becomes of any extension, which requires a written document signed by both parties.

How should breach of the exclusivity be sanctioned?

The sanction must be quantified. Without a fixed sum, breach of the exclusivity obliges the ousted buyer to prove a loss that the courts reduce to the costs actually incurred. A liquidated damages clause (clause pénale), the regime of which is set out in article 1231-5 of the French Civil Code, turns that uncertain exercise into a liquidated claim. The amount must remain proportionate: the court has the power to reduce it if it is manifestly excessive, on the same logic as the one set out on the liquidated damages clause in commercial law.

What can the seller obtain in exchange for a long exclusivity?

The seller negotiates what comes in return. A long exclusivity is offset by four matching undertakings placed on the buyer.

1. Delivery of the due diligence findings by a fixed deadline, so that the seller knows the buyer's position on a date known in advance.
2. Proof of financing by a certain date, a bank letter of interest or a certificate of funds, failing which the exclusivity lapses.
3. A cap on the number of follow-up requests, in order to avoid due diligence that drags on through successive waves of questions.
4. A right of immediate termination available to the seller if the price is renegotiated beyond a threshold agreed in advance.

How does the letter of intent frame the due diligence and the data room?

How should the duration and the scope of the due diligence be framed?

The letter of intent frames the due diligence. It defines the scope of the checks, the anticipated duration, usually four to eight weeks, the persons authorised to take part and the access arrangements. This framework protects the seller against open-ended due diligence and the buyer against piecemeal disclosure. It also allows the sale and acquisition of a business to be prepared on a timetable that remains workable for the running of the business.

What purpose does the data room index serve?

The data room organises the evidence. The documents made available form the basis of the seller's representations in the sale and purchase agreement. A dated, time-stamped and countersigned index establishes what was disclosed and, by symmetry, what was not. That traceability governs the later effectiveness of the warranty and indemnity agreement: what appears in the disclosure schedules can no longer be claimed under the warranty.

Which conditions precedent does the due diligence prepare?

The due diligence feeds the conditions precedent. Five obstacles identified as early as the letter of intent become conditions precedent drafted into the sale and purchase agreement.

1. The buyer's bank financing, the obtaining of which governs payment of the price on the closing date.
2. The commercial landlord's consent, where the lease makes the transfer of the shares or of the business as a going concern (fonds de commerce) subject to its authorisation.
3. The consent of key customers, essential where the material contracts contain a change of control clause.
4. The administrative authorisations specific to the sector of activity, approvals, licences or prior declarations.
5. The prior information of employees where it is required, the time limit for which must be built into the timetable.

Naming them in the letter of intent prevents a blocking point from surfacing late, after several weeks of work.

Should escrow of the price be provided for at this stage?

Securing the price is prepared upstream. Where the warranty and indemnity agreement is backed by a retention on the price, the principle of a contractual escrow and its order of magnitude arise as early as the letter of intent. Negotiating the amount and the duration of the retention at the final signing meeting, when the funds have been gathered and the timetable is tight, invariably places one of the parties at a disadvantage.

Can negotiations be broken off after a letter of intent?

Is a party free to break off negotiations?

Breaking off negotiations remains free. Article 1112 of the French Civil Code lays down the freedom to initiate, to conduct and to break off pre-contractual negotiations. No one is required to conclude the contract. The Cour de cassation (the French supreme court for civil and commercial matters) restated this on 7 January 2026 (no. 24-17.039), confirming the principal's freedom not to pursue the transaction. That freedom is the principle: fault is the exception, and it is for the party alleging it to establish it.

When does breaking off become wrongful?

Fault presupposes a legitimate expectation that has been disappointed. The Cour d'appel de Versailles (court of appeal), on 4 February 2025 (no. 23/06023), held that good faith requires a party not to end negotiations after having created in its counterparty a legitimate expectation that the transaction would be concluded. The Cour d'appel de Montpellier, on 19 May 2026 (no. 25/01150), defines a wrongful breaking off as the abrupt cessation, without legitimate reason, of advanced talks. Two criteria therefore combine: how far the talks have progressed, and the absence of a legitimate reason.

Must the talks be advanced?

Talks at an early stage are not protected. The Cour d'appel de Bordeaux, on 26 November 2025 (no. 23/01622), refused any compensation for want of a sufficiently advanced stage. Signing a letter of intent is a strong indication that the talks have progressed, but it is not enough: it is the scale of the work undertaken, the length of the discussions and the assurances given that determine the characterisation.

Which reasons for breaking off are held to be legitimate?

The reason for breaking off must be legitimate. The Cour d'appel de Saint-Denis de la Réunion, on 19 March 2025 (no. 23/01653), held a breaking off to be wrongful where the reason for it was not legitimate, and awarded 18,137.50 euros. The disclosure of a significant liability during the audit, a notified refusal of bank financing, or the discovery of an undisclosed customer dependency are all legitimate reasons. A change of mind, the appearance of a competing target considered more attractive, or an opportunistic renegotiation of the price are not.

How should the breaking off of negotiations be documented in order to be protected?

Documenting the breaking off is decisive. The party breaking off must be able to produce the objective reason that led it to do so: an audit report, a written refusal from a bank, the minutes of an investment committee. A breaking off notified by a reasoned letter, following a debriefing meeting, can be defended. A breaking off by silence after several months of work cannot be defended.

What can be obtained in court after negotiations are wrongfully broken off?

Which losses are actually recoverable?

Only the costs incurred are compensated. Compensation covers the expenditure actually laid out: legal fees, due diligence costs, travel expenses, and possibly the management time taken up by the deal where it is documented. It is assessed under article 1231-2 of the French Civil Code, but article 1112 of the French Civil Code expressly excludes compensation for the benefits expected from the contract that was not concluded.

Can loss of a chance be relied on?

Loss of a chance is ruled out. The Cour de cassation (the French supreme court for civil and commercial matters), on 3 December 2025 (no. 24-17.537), excluded loss of a chance in the field of pre-contractual liability. The Cour d'appel de Versailles (Versailles court of appeal), on 19 May 2026 (no. 25/01504), also ruled out loss of a chance and non-pecuniary loss in the absence of clearly established fault. The seller who has been passed over cannot therefore claim either the margin it was counting on or the difference with a competing offer it turned down.

What amounts do the courts award?

The amounts awarded remain modest. The Cour d'appel de Montpellier, on 9 June 2026 (no. 25/01645), awarded 28 200 euros for wrongfully breaking off negotiations despite the existence of a letter of intent. These orders of magnitude, a few tens of thousands of euros, bear no relation to the value of the transaction that was missed. That is precisely what justifies stipulating a fixed-sum indemnity: it is the only mechanism capable of securing more than reimbursement of the costs.

How can reimbursement of due diligence costs be secured?

The clause allocating due diligence costs completes the arrangement. Providing that a buyer who breaks off without legitimate grounds bears the costs incurred by the seller, and vice versa, creates a contractual claim that does not depend on proving fault and loss. It is a simple device, rarely disputed, and far more effective than litigation over pre-contractual liability.

Which mistakes should be avoided when signing a letter of intent?

Can the buyer's template be signed without reworking it?

Signing the buyer's template without reworking it. The letters of intent that circulate in practice are drafted by the buyer or by its adviser. They almost always combine a long exclusivity period, non-binding undertakings on price and firm obligations borne by the seller alone. Symmetry is a matter for negotiation: an undertaking by the buyer on the timetable for delivering the due diligence report, evidence of financing, a cap on additional requests.

Why should the indicative and the conditional not be mixed?

Mixing the indicative and the conditional. A letter of intent drafted without discipline in its grammatical tenses creates a risk as to interpretation. The drafting rule is mechanical: the conditional and the vocabulary of intention for what does not bind, the present indicative and the vocabulary of obligation for what does bind, with a closing clause listing the binding provisions.

Should the prior information of employees be anticipated?

Leaving out how the information of employees is dealt with. In companies with fewer than two hundred and fifty employees, the obligation to inform employees in advance of a sale, laid down in articles L. 23-10-1 et seq. of the French Commercial Code, must be anticipated as early as the timetable of the letter of intent. Late implementation pushes the closing back by several weeks.

How can the buyer's financial capacity be verified?

Neglecting the interaction with the buyer's financing. A letter of intent that requires no evidence of financial capacity exposes the seller to an exclusivity period used up for nothing. Requiring a bank letter of interest or proof of funds by a fixed date, failing which the exclusivity lapses, is a legitimate requirement which serious buyers accept. The structuring of the acquisition debt is then a matter of financing and security interests.

Does trade secret protection cover the information disclosed?

Overlooking the protection of trade secrets. The information disclosed during the due diligence may fall within the protection of article L. 151-1 of the French Commercial Code. Referring to that basis in the confidentiality clause opens up, in the event of disclosure, remedies more effective than contractual liability alone, in particular interim measures.

Frequently asked questions on the letter of intent