Define: Commitment Letters

A commitment letter is a formal document issued by a lender to a borrower, outlining the terms and conditions under which the lender agrees to provide financing or credit. It serves as a binding agreement between the lender and the borrower, detailing the loan amount, interest rate, repayment terms, fees, and other conditions of the loan. A commitment letter typically follows a successful loan application process and signifies the lender’s commitment to provide the requested funds subject to the borrower meeting certain conditions, such as providing additional documentation or meeting specific requirements. Once the borrower accepts the terms outlined in the commitment letter, they are legally obligated to fulfil the conditions specified, and the lender is obligated to provide the financing as agreed. Commitment letters are commonly used in various types of lending transactions, including mortgages, business loans, and lines of credit.

Commitment letters are documents issued by lenders to companies after they have decided to make a loan but before they are ready to complete the formal loan documents. Commitment letters are usually short and describe only the essential terms of the pending loan.

Most commitment letters obligate the lender to make the loan described only if the company meets all of the conditions identified in the letter. Once the conditions are met, the commitment is further documented with more complete (lengthy) loan, security, and guarantee agreements that contain many terms and conditions not specified in the commitment letter.

Commitment letters serve a useful purpose. By setting out the general terms of the loan, they solidify each party’s commitment to move forward with the deal. They also ensure that the parties have, in fact, come to terms with one another on the major points of the deal.

Commitment letters should not be treated lightly. They should be reviewed as carefully as the final, formal loan documents they precede. Even though many of their provisions may not be legally binding (at least until all the conditions are met), some may be enforceable against the company in any event. Also, these letters set the tone for how negotiations over the formal loan agreements will proceed. Both parties will expect the deal to be completed in the manner set out in the letter. As a result, it can be very difficult to negotiate and close a loan that includes terms significantly different from those contained in an earlier commitment letter.

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 11th April 2024.