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A Heads of Terms agreement – also sometimes known as a letter of intent/potential interest, memorandum of understanding, term sheet and term protocol – is a document which lays out the basic terms of a commercial transaction/lease which have been agreed in principle between parties during initial negotiations. Heads of Terms agreements may be used for a number of commercial transactions, including but not limited to public mergers, joint business ventures, financing projects and investments in private equity. This article will explain in further detail what a Heads of Terms agreement is, answering the following questions:
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A Heads of Terms agreement serves as a written confirmation of some of the key terms that have been agreed in principle by both parties. It is therefore very useful in exhibiting how committed and serious both parties are towards the transaction.
Often, a Heads of Terms agreement will outline a time frame/timetable along with obligations of each party throughout the negotiations – this can be particularly beneficial if a transaction is complex or very high in value, as it simplifies an otherwise extremely complicated process.
Several other benefits of having a Head of Terms agreement include:
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A Heads of Terms agreement could be considered legally binding under the Law of Property (Miscellaneous Provisions) Act 1989, but only if:
However, it is crucial to know that while a Heads of Terms agreement does show evidence of serious intent, it is not legally binding if it is ‘Subject to Contract’, which most are. Also, some parts of the agreement could be binding, while others are not. It all depends on the terms set out in the Heads of Terms agreement. |
Although every Heads of Terms agreement is unique to the transaction it outlines, there are specific aspects included in most, such as:
Heads of Terms agreements can be complicated and have several pitfalls associated with them, which is why it’s so important to consult a Commercial Property lawyer and involve them in the process to ensure everything is proceeding in a way that will honour your interests.
If you are unsure of whether your transaction demands a Heads of Terms agreement, or you don’t quite know what should go under one, we at Whitehead Monckton have an exceptional commercial law team available to provide advice or assistance whenever you need it! Please contact us if you have any questions or concerns.
Heads of Terms agreements can be complicated and have several pitfalls associated with them, which is why it’s so important to consult a Commercial Property lawyer and involve them in the process to ensure everything is proceeding in a way that will honour your interests.
