Heads of Terms Heads of terms in commercial transactions from our specialist lawyers in Milton Keynes

The importance of “Heads of Terms” in commercial transactions

Agreeing “Heads of Terms” is an important part of major commercial transactions such as share sales, business transfers and commercial leases. Where commercial property is involved, then it would always be prudent to ensure that one of our commercial property lawyers was also involved from the onset. At Heald Solicitors in Milton Keynes we are experts in drafting “Heads of Terms”.

Similar to a letter of intent or memorandum of understanding, “Heads of Terms” are drawn up once the parties have agreed on the main terms of a commercial agreement, but before legal drafting begins in earnest.

The importance of Heads of Terms

It is vital to get legal advice before you agree “Heads of Terms”. These should be an accurate reflection of the deal you intend to make with the other side. While not legally binding, they form the basis for all subsequent legal work. They carry the key terms agreed by the parties. To make demands later in negotiations that are not mentioned in the “Heads of Terms” could weaken your negotiating position – this is why you need advice on them before they are signed.

A “Heads of Terms” agreement can be particularly useful when the proposed transaction is complex. Setting out the proposed terms early in negotiations can help both parties quickly see if the deal looks viable before committing more time and resources towards it if not. This proactive step not only clarifies expectations but also serves as a safeguard against unnecessary expenditure.

Key Components of Heads of Terms:

When drafting “Heads of Terms”, several essential provisions should be included:

• Basic Information
  It’s crucial to include enough detail to guide the drafting process without constraining the parties unnecessarily. Too little detail can lead to confusion and delays, while too much can also create issues and that restrict one of the parties more than was intended.
• Key Points
  “Heads of Terms” should be used to highlight critical issues that might impact the transaction. Addressing these at the outset helps prevent potential deal-breakers from derailing progress.
• Price of the Transaction
  Clearly state the financial terms that have been agreed, along with not only the price being paid, but the timings of any payments that may on some occasions be staggered after completion.
• Purpose of the Contract
  Define the intended outcome or objective of the agreement.
• Specific Terms
  Include any unique conditions that are relevant to the transaction.
• Confidentiality Clauses
  Ensure provisions are in place to maintain privacy and protect sensitive information.
• Protection Clauses
  Outline measures to safeguard each parties interests if the deal fails to complete, or an issue arises after completion, along with any costs that may become liable to each party.

In addition to these benefits, “Heads of Terms” may include 'lock out' clauses, which can be legally binding. These clauses prevent the parties involved from negotiating with third parties for a specified time, creating a secure environment for the transaction.

Advantages of Lock Out Clauses:

• Reduced Pressure
  All sides can negotiate without the fear of losing the deal to another party
• Stability
  Knowing that neither side is exploring other options provides a stable foundation for discussions.

These mechanisms are designed to ensure that negotiations proceed smoothly and both parties feel confident in the process, without the pressure of looming external negotiations. By having a comprehensive “Heads of Terms” in place, you position yourself for a successful transaction from the very beginning.

When agreeing “Heads of Terms”, also consider the following to avoid them being unintentionally binding:

• Use 'Subject to Contract'
  Incorporating this phrase can indicate that the agreement is not intended to be final. However, be cautious—if parties start fulfilling obligations before finalising legally binding documents, this presumption might be undermined.
• Short-term Lease Specifics
  For leases under three years, which do not require a deed, be aware of the Law of Property (Miscellaneous Provisions) Act 1989. This act may assume terms are binding if they are written, signed by all parties, and include essential contractual elements like offer, acceptance, consideration, and the intention to create legal relations.
• Rectification Risk
  Even if “Heads of Terms” are not legally binding, they can serve as evidence of the parties’ intentions. This could lead to a rectification claim, potentially altering a binding legal document if it doesn’t accurately reflect the parties' original deal.

By addressing these points, you help ensure that “Heads of Terms” remain a useful tool in negotiations without inadvertently creating legal obligations.

By clearly defining the core terms, you create a foundation that streamlines further discussions. Remember, “Heads of Terms” act as a compass guiding the negotiation process, ensuring both parties are aligned on the main objectives. Taking this preliminary step can prevent misunderstandings and foster a smoother negotiation journey.

The corporate and commercial team at Heald in Milton Keynes will help you prepare a “Heads of Terms” document that will form a robust framework for future negotiations. We’ll work with you to identify all the key commercial provisions of the transaction, as well as any deal breakers.