A guide to heads of terms

Heads of terms play a crucial role in setting the foundation for commercial agreements. Understanding what heads of terms are, their legal implications, and how to create them effectively, is good practice.

In this guide, we provide a detailed overview of heads of terms, giving you the knowledge needed to navigate this aspect of business deals.

What are heads of terms?

Heads of terms, also known as a letter of intent or memorandum of understanding, usually outline the key commercial terms and conditions agreed upon by parties involved in a potential business transaction.

They are often utilised in complex, important, high value commercial transactions.

This initial agreement helps to establish a framework for negotiations and allows parties to set out their intentions before entering a formal contract.

The purpose of heads of terms agreements

It is important for all parties to have a clear understanding of each other's expectations and objectives before entering more detailed negotiations. Heads of terms facilitate this by outlining the main points of agreement, such as:

• the purchase price;
• payment terms;
• delivery schedules; and
• any other relevant commercial terms.

This helps to minimise misunderstandings and ensures that both parties are on the same page from the outset.

Heads of terms can also address important legal and regulatory considerations. For instance, if the transaction involves intellectual property rights or licensing agreements, the heads of terms can specify the scope of these rights and any restrictions or obligations associated with them.

Are heads of terms legally binding?

Heads of terms can either be legally binding, not legally binding, or partially legally binding — there are no definitive legal rules or requirements on this. It is not unusual to have a situation where some aspects of heads of terms are expressed to be binding and enforceable and others not. Accordingly, it is important to clearly define the binding and non-binding elements in the heads of terms to avoid any misunderstandings.

The difference between heads of terms and a contract

Heads of terms are agreed before more detailed contract negotiations begin and provide a framework for negotiations.

Once the heads of terms are agreed, the parties will proceed with the drafting and execution of the formal contract.

What should be included in heads of terms?

While the specifics will vary depending on the nature of the transaction, some key elements commonly included in heads of terms are:

• The identities and contact information of the parties;
• A clear description of the proposed transaction or agreement;
• Key commercial terms and conditions, such as price, payment structure, and delivery timelines;
• Provisions on intellectual property rights, confidentiality, and exclusivity, if applicable;
• Any specific conditions precedent or subsequent necessary for the agreement;
• Dispute resolution mechanisms and termination clauses.

Responsibility for drafting heads of terms

The responsibility for drafting heads of terms may fall on either party involved in the negotiation, but it is common for the party initiating the transaction or deal to create the initial document.

Can we help?

Getting heads of terms right is a crucial first step in ensuring a smooth and successful negotiation process, so it’s important that you get them right. Our commercial contracts solicitors can provide you with expert advice and drafting support.