Explaining Heads of Terms and their growing importance
When we set up Newmanor Law, we not only wanted to be a specialist real estate law firm that did things differently, with agreed fixed pricing for our expertise, but a firm committed to delivering on our promises.
It is this dedication to delivering on the promise, without nasty surprises when the deadline draws near that sums up the importance of ‘Heads of Terms’, particularly in real estate deals and lease negotiations.
They represent the earliest stage at which the terms of a commercial transaction are set out in writing by both parties, often also referred to as letters of intent, heads of agreement, letters of potential interest, protocols and term sheets.
The Heads of Terms are terms agreed by both parties during negotiations, which although evidence genuine intent and will carry some force should a dispute occur later, they are not legally binding – neither party is legally obliged to conclude the deal on the basis of those terms.
In fact, simply agreeing Heads of Terms is no guarantee the deal will be concluded at all, although it is possible to include specific provisions within the terms that are legally binding in themselves.
These often include provisions which relate to confidentiality or some aspects of the costs of a deal, but the fact that it is possible for a non-binding document of this kind to include provisions which the parties agree should be binding is a very good reason why Heads of Terms should be drawn up extremely carefully and with the benefit of expert legal advice.
The purpose of Heads of Terms
Heads of Terms provide a written record of the main terms of a deal, as agreed by both parties, which can typically be done without generating the likely legal costs involved in drafting contracts and definitive agreements.
They are usually done before most solicitors are instructed. However, we believe we can add value at this early stage by helping the client to see the bigger picture and guiding them on the norm for certain transactions.
This process takes place in the early stages of any transaction, after preliminary terms have been agreed but before detailed due diligence has been carried out.
If negotiations are particularly prolonged, the parties might enter into a series of Heads of Terms as the deal progresses, each one providing a milestone for the state of current negotiations and a road map for the next stages of the deal.
Heads of Terms also set out a timetable for the on-going negotiations and describe the obligations placed upon both parties, with a small number of legally binding clauses such as an exclusivity agreement, enabling the rest of the negotiations to take place in good faith.
When negotiating the Heads of Terms, both parties should stick simply to the deal in principle rather than detail, ensuring all parties consider whether enough potential agreement exists to make attempting a deal worthwhile.
The nature of Heads of Terms means any major issues which cannot be resolved at this stage are likely to eventually become deal-breakers. Although, with general terms agreed and set out in a document, it can be more difficult for either party to back out at a later stage.
This document acts as a kind of ‘proof of concept’ for the deal, demonstrating the proposition has a future. The legally binding nature of some parts of the Heads of Terms will provide a degree of security for the parties, particularly when there are commercial sensitivities involved.
These provisions might include confidentiality, or an exclusivity period when negotiations with third parties are forbidden. Any party relying on provisions of this kind to protect their assets will feel much more confident proceeding with negotiations once the Heads of Terms have been agreed.
And, once drafted, the Heads of Terms can prove useful when it comes to informing any external advisors being brought in to help, as they offer a quick guide to the key provisions of the deal being negotiated.
In this blog we have looked at the purpose of Heads of Terms and how important they are in business negotiations, but in part two, we’ll look at what you might expect to see included and what you need to look out for.
In the meantime, if you are preparing a property deal or hope to enter lease negotiations soon and would benefit from the expertise of an experienced specialist real estate law firm, please get in touch with partner Karen Mason on, 0207 464 4081 or email firstname.lastname@example.org