Heads of Terms: What They Are, What They Include, and Whether They Are Binding

Heads of terms are a document that records the key commercial terms agreed between parties before a formal contract is drafted. They are used across a wide range of transactions, including commercial property deals (leases), business acquisitions, joint ventures, and commercial supply agreements. They are sometimes called heads of agreement, a term sheet, a letter of intent, or a memorandum of understanding. Lots of different names, but they all mean the same thing!

Whatever they are called, the purpose is the same. Heads of terms allow both parties to confirm they have reached agreement on the fundamental commercial points before investing significant time and money in full contract documentation. They reduce the risk of a transaction collapsing late in the process because of a misunderstanding about a core term.

When Are Heads of Terms Used?

Heads of terms are particularly common in the following types of transaction:

• Commercial property leases: whether leasing or purchasing premises, heads of terms typically set out the parties, the property, the price or rent, the length of the term, and the key conditions before the lawyers prepare the full lease or transfer documentation.
• Business acquisitions and sales: where one company is buying another, heads of terms confirm the purchase price, the deal structure (whether a share sale or asset sale), any conditions to completion, and the timetable.
• Joint ventures: before a formal joint venture agreement is drafted, heads of terms can confirm the equity split, governance structure, and each party’s contributions.
• Commercial contracts: in larger supply or service agreements, heads of terms can set out pricing, scope, exclusivity, and key commercial terms before the detailed contract is prepared.

Are Heads of Terms Legally Binding?

This is the question that causes the most confusion. The answer is that it depends. If you are around lawyers, you will hear the words “it depends” very often. Heads of terms can be fully non-binding, fully binding, or, most commonly, a combination of the two with some clauses expressed as binding and others not.

Most heads of terms are expressed as non-binding in relation to the substantive transaction. This reflects the reality that neither party wants to be legally committed to completing the deal before full due diligence and legal documentation has been carried out. However, this does not mean the document is without legal effect in its entirety.

Clauses that are commonly expressed as binding

Even in a non-binding heads of terms, the following types of provision are often drafted as legally binding:

• Confidentiality: the parties agree to keep the existence and terms of the negotiations private. This is enforceable regardless of whether the deal completes.
• Exclusivity: one party agrees not to negotiate with any other potential buyer or tenant for a specified period. A well-drafted exclusivity clause is binding and gives the other party confidence to invest in due diligence.
• Costs: the document may specify who bears legal and professional costs, and what happens to those costs if the deal does not proceed.
• Governing law: the document states which law governs any dispute about the heads of terms themselves.

Clauses that are typically non-binding

The substantive commercial terms, including the purchase price, the scope of services, completion mechanics, and representations and warranties, are usually expressed as non-binding and subject to contract, pending the execution of formal documentation.

What Happens If Heads of Terms Are Not Followed?

Because the substantive terms are typically non-binding, there is generally no legal obligation to complete the transaction on the terms set out in the heads. Either party can withdraw without legal consequence, subject to any binding provisions such as exclusivity or costs.

However, if one party has relied significantly on the heads of terms to their detriment, for example by incurring substantial expenditure or passing up an alternative opportunity, they may have a limited claim in estoppel or misrepresentation in certain circumstances. The law here is complex and outcome-dependent on the specific facts.

The practical point is that heads of terms should be taken seriously even when non-binding. Walking away from a transaction without good reason can damage a commercial relationship and, in some cases, create unexpected legal exposure.

Common Mistakes in Heads of Terms

A poorly drafted set of heads of terms can create problems that cost far more to resolve than the original document cost to prepare. The most common mistakes include:

• Being accidentally binding: using language that could be interpreted as creating a binding obligation, such as “the parties agree” rather than “the parties intend, subject to contract”, can cause heads of terms to be treated as a binding contract.
• Being too vague: imprecision on key points such as price or scope of what is being acquired can lead to disagreements at the full documentation stage, slowing the transaction or causing it to collapse.
• Omitting exclusivity: without an exclusivity clause, the other party is free to negotiate with third parties while the deal progresses. This leaves one party exposed if they have invested heavily in the process.
• Failing to address confidentiality: without a confidentiality obligation, sensitive commercial information shared during negotiations may be used by the other party for other purposes if the deal does not complete.
• Overlooking conditions: in many transactions there are steps that must occur before the deal can proceed, such as obtaining planning permission or board approval. These should be clearly set out so both parties understand what happens next.

Heads of Terms vs Letter of Intent vs Memorandum of Understanding

These terms are often used interchangeably, and in practice they serve a similar function. Where differences exist, they tend to reflect convention in a particular sector rather than a legal distinction. In property transactions “heads of terms” is standard. In mergers and acquisitions “term sheet” or “heads of agreement” is more common. In international commercial deals “memorandum of understanding” is frequently used.

What matters is not the label but the content of the document and whether individual provisions are expressed as binding or non-binding.

When Should You Involve a Lawyer / Solicitor?

Heads of terms are often negotiated between the commercial parties themselves, with legal input arriving at the full contract stage. This can be a false economy. A lawyer / solicitor reviewing heads of terms before they are signed can:

• Spot provisions that are unintentionally binding.
• Advise whether the commercial terms are customary or whether there are gaps that will create problems later.
• Draft or review the confidentiality and exclusivity provisions.
• Flag structural issues in the deal that will need to be addressed in the full documentation.

At Freeman Harris, our commercial contracts team advises on heads of terms across a range of transaction types. We can review a set of heads of terms prepared by the other side and provide rapid practical advice, or draft heads of terms on your behalf from the outset.

If you are entering a commercial transaction and want the foundations to be right before you commit to the full process, contact us for an initial conversation.

Frequently Asked Questions

Do heads of terms have to be in writing?

No, but they should be. A written document reduces the risk of misunderstanding about what was agreed and provides a clear reference point for the lawyers on both sides when drafting the full contract. Oral heads of terms, while possible in principle, create uncertainty and should be avoided in any transaction of significance.

Can heads of terms create a binding contract?

Yes, if they are drafted carelessly. If a court finds that the language of the heads of terms demonstrates an intention to be immediately bound, the document can be treated as a binding contract even if that was not the parties’ intention. This is why the language used matters, and why legal review before signing is valuable.

How long does it take to agree heads of terms?

This depends on the complexity of the transaction and the number of parties involved. A straightforward commercial lease or supply agreement might have heads of terms agreed within a few days. A business acquisition with multiple conditions and a complex deal structure may take several weeks of negotiation.

What is an exclusivity period in heads of terms?

An exclusivity period, sometimes called a lock-out or no-shop period, is a binding obligation on one party not to negotiate with any third party for a specified window of time. This gives the other party confidence that they can invest in due diligence and legal costs without the risk of a competing offer being accepted. Exclusivity periods typically run for between 30 and 90 days.

What happens after heads of terms are signed?

After heads of terms are signed, the parties move to the full documentation and due diligence stage. In a property transaction this involves lease or transfer documents and searches. In an acquisition it involves the sale and purchase agreement, disclosure process, and any regulatory approvals. The heads of terms act as the agreed commercial starting point for that process.