What is the meaning of a Heads of Terms Agreement in the UK?

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:

• What are the benefits of a Heads of Terms agreement?
• Is a Heads of Terms agreement legally binding?
• How do you create a Heads of Terms agreement?
• What our experts have to say about Heads of Terms agreements

What are the benefits of having a Heads of Terms agreement?

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:

• That it gives the commercial solicitors a strong starting point when drafting contracts later on.
• That if third parties want to look over the agreement, they are able to do so easily.
• That having a solid Head of Terms agreement both parties are happy with can lead to shorter negotiations and less friction going forward, speeding up the overall conveyancing process.

Is a Heads of Terms agreement legally binding?

A Heads of Terms agreement could be considered legally binding under the Law of Property (Miscellaneous Provisions) Act 1989, but only if:

• The Heads of Terms agreement is in writing.
• It includes all the terms which have been explicitly agreed by both parties.
• Both parties have signed the agreement.
• The Heads of Terms agreement includes an offer, acceptance, consideration and an explicit intention to form a legal relationship.

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.

How do you create a 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:

• Information about the respective parties
• Details of the demised premises (the property owned by the leaseholder)
• Confidentiality provisions
• The price/rent
• A timeline or timetable
• Key terms of the deal
• Information about permitted use
• Any issues that need to be discussed or considered further
• Details about the term or duration of the agreement

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.

Alexander Bak

Director and Head of Property

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