Heads of terms (also known as memorandum of understanding or letter of intent) is a non-binding document setting out the terms of a commercial transaction between the parties during their negotiation. They are an important preliminary step in negotiations and put parties on the same page before entering a formal contract.
How should heads of terms be recorded?
It is always best practice to record the terms in a document with enough detail to ensure that the deal reached is accurately reflected in the legal documents. It is however crucial to remember that heads of terms are not a substitute for legal documentation and that any legal documentation necessary for the deal to be concluded should be included.
Are heads of terms legally binding?
Most often, no. Heads of terms are the foundation of an agreement upon which formal, binding, legal documentation can thereafter be created. Heads of terms are often noted as “subject to contract” which conveys the intention of the parties, not to be legally bound by those terms. Only once the formal documentation is agreed and completed, will parties be bound.
Creating a balance
What heads of terms include largely relies on the circumstances of the parties and the transaction. It is important to caution against an overly detailed approach as this leads to protracted negotiations and unnecessary delay in underlying legal work which in turn will push back getting a deal agreed.
What should Heads of Terms include?
Key commercial and legal terms as well as practical points should be included such as the purchase price, property details, VAT status, conditionality, financing and tenancy details or treatment of arrears. If dealing with a lease, key terms including everything from rent, demise details, beak dates, repairing obligation, permitted alterations, tenant security, and more.
While heads of terms are not legally binding, they provide a framework for further discussions and are helpful in getting parties to clarify their intentions before entering a formal contract. Parties that choose to exclude heads of terms run the risk of dealing with disputes and deteriorating relationships thereby causing unwanted delays. If you are looking to purchase or lease commercial property please contact our commercial property team on 01256 844 888 or fill out an enquiry form on our homepage.