Most clients and agents will agree that, if used correctly, Heads of Terms are a useful tool to set out the overall scope of a deal and to record the main points of principle. They are central to identifying the key deal making and breaking terms of a particular transaction. Chris Dixon, Senior Associate in Rawlison Butler's Real Estate Team offers some words of warning.
Agreeing Heads of Terms creates confidence between the parties
and the all important "moral obligation" on parties to
proceed with the particular transaction as set out in those Heads
of Terms. It's said that, psychologically, it's
harder to renege on commitments which are set out in formal Heads
of Terms.
Good Heads of Terms should make the later legal negotiations
quicker and easier and reduce costs but whilst Heads of Terms are
an important element of a deal, care needs to be taken:
- Mistakes, omissions or loose wording when producing Heads of Terms will make negotiations harder and are difficult to reverse in legal negotiations (with cost and wider implications);
- Avoid spending too long dealing with the Heads of Terms themselves rather than focusing on the actual legal documents; and
- Crucially, avoid making the Heads of Terms binding when that's not intended. Making them "subject to contract" is a must but alone may not be enough.
When drafting or negotiating Heads of Terms you should:
- Include a statement that they are not intended to be legally binding or exhaustive;
- Avoid mixing anything intended to be binding (eg exclusivity or confidentiality arrangements) with any non-binding terms – separate the binding terms into a stand alone agreement;
- Make sure they don't amount to pre-contract representations (and that the contract or agreement provides for this); and
- If you're in any doubt, contact us – we're here to help
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
