Heads of Terms explained

What are Heads of terms?

Heads of terms are intended to summarise the key points agreed between contracting parties before they proceed to a full, comprehensive contract.

Heads of terms are sometimes also referred to as a Letter of Intent, Term Sheet or Memorandum of Understanding. The label given to the document is less important than ensuring it records the key agreed aspects of the deal.

We work with clients who need Heads of Terms for corporate and commercial transactions, including mergers and acquisitions and joint ventures. We do not undertake property law work, although Heads of Terms are also common in property transactions.

What are the advantages of having a Heads of Terms Agreement?

Heads of Terms are not essential for commercial transactions. They are particularly useful for complex, high-value or strategically important deals.

Focusing the parties’ minds on key issues at the Heads of Terms stage can help the transaction progress faster, reduce friction and the risk of last-minute renegotiation, and potentially save legal fees.

Are heads of terms legally binding?

Heads of Terms can be legally binding, non-binding or partly binding, depending on their wording and the parties’ intentions. Some provisions may be intended to be binding and enforceable, while others are not. Clear drafting and appropriate legal advice are therefore important. Binding provisions often include:

• Confidentiality provisions.
• Non-poaching provisions to protect the seller on a business sale when information about employees may be disclosed.
• Exclusivity provisions to protect the buyer.
• Liability for fees, where a party may be required to pay the other party’s fees if it withdraws from the transaction or seeks to renegotiate key terms.

What to include in Heads of terms?

Heads of Terms can be short and simple or more comprehensive, depending on the transaction. Common provisions include:

• The main terms of the deal.
• The identity of the contracting parties.
• The price and how and when it will be payable.
• Timing, including target dates for important next steps.
• Confidentiality obligations covering information shared and, where appropriate, the negotiations themselves.
• Key issues that remain to be discussed or agreed.

How we can help

If you need legal support to advise on, prepare or negotiate Heads of Terms for a business sale or other commercial transaction, please call or email us.