Heads Of Terms In Commercial Agreements

16th August 2018

Heads Of Terms In Commercial Agreements

When negotiating a commercial agreement or contract, the parties will often agree ‘heads of terms’ before negotiating and signing the final document. They might be known as letters of intent, memoranda of understanding, notice of sale or term sheets. But what are heads of terms and why are they used?

Heads of terms are used in many different commercial transactions including joint ventures, property sales, purchases and leases, corporate business sales and mergers. They are a document which sets out the terms of a commercial transaction that are agreed in principle between the parties. They are not usually legally binding, but they create a moral obligation on the parties. They encourage parties to think through certain terms at the outset that will need to be agreed at some point.

Agreeing terms at the beginning of the process (which is when heads of terms are entered into) helps to determine pricing, and prevents delays and any time being wasted further down the line, once the parties have already committed lots of time and incurred significant professional fees. If there is an issue that needs to be negotiated that may cause a stalemate between the parties, then the heads of terms negotiations can ensure this is either resolved or the transaction is called off at an early stage.

Heads of terms can contain as much or as little detail as the parties want or as suits the particular transaction. If a solicitor or other agent draws up the heads of terms then they will usually contain lots of information. However, in some cases parties draw up heads of terms themselves, and they contain only the most basic information necessary.

It is important to balance having too much detail, which may mean discussions become too involved at an early stage, and enough to ensure the heads of terms are a worthwhile document that provide a road map of the transaction.

Notes

For more information about commercial agreements and contracts, click here.