Also known as solicitor letter or lawyer letter or, in French, a mise en demeure.
Demand letters are not always prerequisites for a legal action but there are exceptions such as legal action on promissory notes or if the contract requires it.
Basically, a demand letter sets out why the payment or action is claimed, how it should be carried out (eg. payment in full) and directions and deadlines for the reply.
Demand letters are often used in business contexts because they are a courtesy attempt to maintain some goodwill between business parties and they often prompt payment, avoiding expensive litigation.
A demand letter often contains the "threat" that if it is not adhered to, the next communication between the parties will be through a court of law in the form of formal legal action (i.e. pleadings).
An example of a demand letter would be in the situation of defamation. The plaintiff's lawyer would write to the alleged defaming person and demand a retraction and an apology.
Demand letters are powerful tools in a lawyer's arsenal.
See also without prejudice.