Heads of terms

A set of heads of agreement, heads of terms, or letter of intent is a non-binding document outlining the main issues relevant to a tentative sale, partnership, or other agreement.[1] A heads of agreement document will only be enforceable when it is adopted into a parent contract and is subsequently agreed upon, unless otherwise stated. Until that point, a heads of agreement will not be legally binding (See Fletcher Challenge Energy Ltd v Electricity Corp of New Zealand Ltd [2002] 2 NZLR 433).

However, such documents can be legally binding if the agreement document contains terms or language which explicitly indicates a binding intention. Equally, a letter which contains no expression of whether its terms were intended to be binding can be found to be binding due to language used. (See RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG [2008]) This is also dependent on the circumstances of the transaction and includes the conduct of the parties themselves.[2][3]

Commercial property transaction

In a commercial property transaction in the UK, a heads of agreement is often known as the heads of terms (HOTS). The main purpose of the heads of terms is to identify and highlight the requirements of both the seller and the purchaser of the property. There are a number of advantages of using the heads of terms. For instance, by carrying this out, both parties will fully understand what they are subject to, and can reduce or abolish any misunderstandings from either party.[4] The heads of terms normally contains the following information:

  • Details of the property seller
  • Details of the property purchaser
  • Address of the commercial property
  • Details of the commercial property
  • The purchase price both parties have agreed to
  • The payment information
  • Any special conditions
  • Transaction completion date

See also

References
  1. Website Investopedia (24 Jan 2008), Heads of Agreement
  2. Dammone, L., Letters of intent and heads of terms – binding or not binding?, 31 October 2008
  3. Supreme Court (UK), RTS Flexible Systems v Molkerei Alois Muller GmbH, 10 March 2010
  4. "MOVEHUT Commercial Property Guides: Drafting Heads of Terms".
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