Heads of Terms – What are they, why should we have them and are they enforceable?
Heads of Terms are a document that sets out key terms in a transaction; they are commonly used in commercial transactions such as property purchases, sales and leases. Heads of Terms can include the following fundamental information:-
- The parties (names, addresses and contact details);
- The legal representatives (names, addresses and contact details);
- Description of the land;
- Purchase price/ rent payable per annum;
- The VAT position;
- Proposed completion timescale; and
- For leases provisions for rent reviews, break clauses, rent deposit and security of tenure.
Heads of Terms are drafted when an agreement in principle has been reached. They are beneficial for both parties, ensuring there is a general consensus before the transaction progresses and expenses are incurred. Without them transactions can be delayed, or can fail altogether, if parties can try to re-negotiate or simply have a different view on the terms of the deal, as its proceeds.
But that begs the question, as a transaction progresses if a party changes their view on a particular term, are the agreed points set out in Heads of Terms enforceable?
The answer to this question depends entirely on the circumstances involved. Heads of Terms are generally not intended to legally bind the parties to complete the transaction on the terms, or at all, and the inclusion of the phrase “subject to contract” creates a presumption that they are not. This presumption can however be overturned, for example if the parties begin exercising their obligations set out in the Heads of terms.
Heads of Terms can also include “lock out” provisions, which seek to prevent negotiations with any third party for a fixed period of time; such provisions along with confidentiality provisions, can be enforceable.
This note contains points for consideration, but if you have any questions about Heads of Terms, or would simply like further information about the process please contact Nicola Pearce, a solicitor in our Commercial Property Team at firstname.lastname@example.org or by phone on 0121 227 3850.