A letter of undertaking is an assurance by one party to another party that they will fulfill the obligation that had been previously agreed on, but not written into a contract. For example, if one party wishes to complete some work for a business and get paid for it, the individual would issue a letter of undertaking to the business stating their intentions.
A letter of undertaking is also common in real estate and other transactions where one party wishes to reduce potential losses. For example a property buyer’s bank may request a LOU from the seller assuring them that if the legal transfers don’t go through, any money released to the seller will be returned to the bank. This is used because the bank does not have an explicit contract with the seller.
Undertaking letters are used in many other scenarios as a formal way to state one’s intentions.