Heads of Terms

What are Heads of Terms?

Heads of Terms is a document that lays out the terms of a commercial transaction and the broad principles agreed between parties during negotiations. They are useful as evidence to show how much the parties are committed to the contract. They are also known as letter of intent, heads of agreement, letters of potential interest, term sheets, or memoranda of understanding. 

Are Heads of Terms legally binding?

Usually, Heads of Terms do not have legal binding force. However, they are strong evidence of a party's commitment towards a contract and the intention to create a formal contract. Provisions that relate to costs or confidentiality may be binding.

What should be included in a Heads of Terms?

Heads of Terms will be different for every deal. They should generally include any pre-conditions to the transaction, such as documents to be provided by each party, brief details of the proposals, the parties’ main obligations, a timetable and any binding clauses such as responsibility for costs, confidentiality, and exclusivity.

Heads of Terms should contain brief outlines of the parties’ intentions. If too much detail is included there is a risk the document could start to be viewed as a contract rather than an initial roadmap. For this reason, it should also clearly state that it is not intended to be legally binding.

When (and why) are Heads of Terms used?

There are a variety of transactions in which Heads of Terms would be used, including M&A, joint ventures, private equity, and loan finance. They are used for multiple purposes, including outlining timetables, obligations, and the main terms agreed. 

Heads of terms are usually signed at the start of transactions after initial terms have been negotiated and before due diligence has begun.


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