Heads of terms set out the key provisions of a transaction which have been agreed between the parties and form the starting point to a matter. They are used at pre-contract stage and are most commonly seen within both commercial property and corporate matters. They set out the basis of the work to be undertaken which requires the contracting parties to enter into negotiations at the outset.
What are head of terms?
Every transaction is bespoke and differs from the next. Consequently, heads of terms are not one size fits all and can vary, depending on the complexity of the transaction. In setting out skeleton provisions, there are certain points we would expect to see as standard within the heads of terms:
Parties: Set out the details of those involved in the transaction and their representation so that communications can get up and running quickly.
Transaction: Provide details of the transaction. Consider:
For commercial property, are you buying, seller or leasing a property?
For corporate, are you disposing or acquiring and does it involve shares or assets?
Price: Whether this be annual rent or a purchase price, this starts the next conversation in relation to taxes.
Costs: This covers how parties will be financing the transaction and ensures that appropriate arrangements can be made to get things off the ground quickly.
Timings: Ensures everyone is working to the same timeframe and that parties expectations are understood from the outset.
Specific arrangements:
Commercial Property: For leases in particular, it is worthwhile providing for as much information as possible including, security of tenure, break rights, alienation, service charges and insurance costs.
Corporate: For corporate transactions, it is beneficial to provide as much information as possible about the parties, any businesses and operations and the background to the transaction. This helps ensure that ancillary matters relating to employment and property, as well as additional transaction details, are identified and addressed as quickly as possible.
Legal status of Heads of Terms
Heads of terms are not intended to bind the parties and remain subject to contract. Under the Law of Property (Miscellaneous Provisions) Act 1989, heads of terms may be considered legally binding and themselves fulfilling the criteria of a valid contract. Therefore, importantly, heads of terms should include a note to be ‘subject to contract’. This reinforces that they are only intended as an aid to the transaction. Additionally, to avoid circumstances where the entirety of heads of terms are considered legally binding, you can mark certain provisions ‘not expressed to be legally binding’ and others as ‘expressed to be legally binding’.
What are the benefits of Heads of Terms agreements?
Although a transaction can proceed without heads of terms, it is worthwhile considering the benefits of taking the time to negotiate the heads of terms for your transaction.
Transparency on legal costs
In agreeing with the other contracting party and providing your solicitor with the heads of terms, this outlines how the transaction will proceed and the documentation and information that will be required. Your solicitor will be able to provide a fee estimate for the work, with a good understanding of the scope of the transaction.
Save on legal costs
With heads of terms in place ready for the drafting to begin, this saves the back and forth exchanges between solicitors and taking instruction from their respective clients as to the terms of the deal. Certain provisions in the heads of terms may require bespoke drafting which can be assessed from the outset.
Identify and address contentious issues
The initial negotiation involved in the heads of terms will help identify and address any disagreements that may largely protract or abort the transaction later down the line.
Peace of mind
Heads of terms kickstarts the relationship between the parties and can provide peace of mind that the transaction is set out and ready to be drafted by a solicitor.
What are the disadvantages of Heads of Terms agreements?
Parties should be mindful of the intention created with the heads of terms and maintain momentum to ensure the legally binding documents are put in place promptly thereafter.
Lack of legal bind
Whilst the heads of terms provide good momentum at the outset of the transaction, if the parties fail to action the heads of terms and enter into a legally binding document, they may find themselves governed by implied terms set out in English law..
Unresolved key issues
When key issues may not be agreed upon or provided for in the heads of terms, this can lead to delays or cost increases in the transaction. Heads of terms need to be drafted with consideration of the full transaction.
Do I need a head of terms?
Heads of terms are a worthwhile consideration for ensuring that your transaction gets off the ground promptly (although they are not mandatory and your solicitor can proceed without them).
Heads of terms are a good aid for kickstarting transactions and act as a basis for the transaction as a whole. It is worth considering whether heads of terms would suit your transaction and if you are keen to press ahead. If so, formal heads of terms may be what your transaction needs to get things off the ground.
What happens next?
We recommend using an experienced commercial agent for property or corporate transactions. In addition, for Corporate transactions, your accountant is also likely to be a good point of reference for assistance with preparing your heads of terms. A commercial agent or accountant will be able to assist with agreeing and drafting heads of terms. Solicitors work closely with commercial agents and accountants to ensure that your transaction is streamlined.
Your agent will be able to assist with the preparation of heads of terms which will reduce negotiations later and speed up the process.
How can Goughs help?
Our Commercial Property and Corporate solicitors can provide assistance throughout your transaction, whether that be by working on the heads of terms provided, through to completing and dealing with the post completion formalities of a transaction.
If you would like some help with your heads of terms, please get in touch with us today.
