Whether a commercial transaction is complex or relatively straightforward, properly drawn Heads of Terms are an important part of the negotiating process.
Heads of Terms aim to set out the key commercial principles that have been agreed by the parties during negotiations and will then form the basis of a future, more detailed contract.
Nicola Phelps, director and commercial property specialist at WHN Solicitors, outlines the key points to consider when drawing up Heads of Terms. Coined as the ‘Six key Cs’ – they are: clarity, consensus, commitment, costs, caution and counsel.
1. Clarity
There is no fixed format for Heads of Terms. They may be set out in one document, or for simple transactions, may merely be covered in an email exchange.
Committing to written Heads of Terms ensure negotiations are focused and clear. This helps to avoid misunderstandings that may occur in verbal and informal discussions.
Heads of Terms should clarify the ‘what’, the ‘who’ and the ‘when’ in the negotiations. For example:
- What are you trying to achieve?
- When is it to be achieved?
- Who is doing what?
- What is the price?
Setting out these basic terms in written form at an early stage of negotiations, and establishing key events and dates, prevent discussions going off track. Heads of Terms ensure all parties know who is responsible for what.
Heads of Terms should always be used to clarify any complex or confusing parts of a transactional deal.
2. Consensus
Drafting Heads of Terms should highlight any major issues or irreconcilable differences that need to be addressed to establish there is sufficient consensus to proceed.
It is not unusual for parties to have differing views of what they perceive was agreed in negotiations. When put in writing, any disadvantages in the proposed structure, or detail of the deal, may then become clear.
Therefore, misunderstandings and mistaken assumptions which may lead to wasted time and expense, should be resolved at the Heads of Terms stage.
3. Commitment
Well drafted Heads of Terms act as a good indicator to show how serious all parties are in proceeding with the transaction. If a party is reluctant to put in the work to finalise and agree Heads of Terms, they are less likely to be committed to the final deal.
Heads of Terms demonstrate the parties are morally committed to the transaction and are serious in their intention to proceed, as they evidence the main points agreed, making it difficult for parties to renegotiate terms later.
4. Costs
Well-drawn and considered Heads of Terms should provide a skeleton for your legal adviser to draw up future documentation and contracts. With the main terms agreed, further negotiation should be limited which will result in cost savings.
Making the effort at the start of a business negotiation to draw up agreed Heads of Terms will ensure a timelier progression to the final documentation and completion.
5. Caution
The success of Heads of Terms will depend to a large extent on bargaining power and advice.
It is also important to consider and be cautious about the following:
- Too detailed Heads of Terms may prevent any ‘room for manoeuvre’. Although this goes somewhat against what is set out above (Heads of Terms prevents renegotiation) parties may wish to retain some leeway for future negotiation.
- Do not let Heads of Terms take on a life of their own. They do take time and resources to complete but should not become so detailed as to attempt to cover every eventuality.
- Heads of Terms should be limited in time and should be reviewed and confirmed prior to instructing any legal advisors to ensure they are still up to date.
- Although Heads of Terms are helpful in crystalising and agreeing the main structure of any transaction, it is important to ensure they are not legally binding. This may be achieved by including a specific term, confirming there is no intention to create a legally binding document.
- Heads of Terms should document future intentions but not enforce obligations. Be careful to ensure that no action is taken to implement any of the Heads of Terms before contractual documentation has been entered into, as this may suggest an intention to be bound by them.
Elements of Heads of Terms can be enforceable if agreed by both parties, for example, a lock-out / exclusivity for an agreed time. However, if this is required it would be more sensible for a separate agreement to be entered into rather than just including it in the Heads of Terms.
6. Counsel
It is sensible at the outset of any transaction to obtain advice from relevant professionals. There are several reasons for this:
- A transaction may have unknown tax consequences so an accountant may need to be consulted.
- A surveyor may need to be involved in respect of any property-related negotiations.
- It is helpful to involve your legal advisor at the outset of negotiations of detailed Heads of Terms.
Seeking advice at the start of negotiations will help ensure the necessary care and attention goes into drafting the Heads of Terms.
Involving experienced professionals during the process will, in the long term, save you time and money. It also reduces the risk of including (or excluding) a critical component to the transaction that may cause issues in later negotiations or perhaps even after the final contract is signed.
Nicola is a director based at WHN’s Clitheroe office and advises on all types and sizes of businesses, from large companies to sole traders and partnerships, and unincorporated associations and clubs.
With expertise in development agreements, public and private funding, joint venture agreements, site assembly, promotion agreements and overage agreements, Nicola also has a wealth of experience in general commercial property transactions. To contact Nicola, call 01200 408300 or email nicola.phelps@whnsolicitors.co.uk
