Heads of Agreement

Describes the actual conditions of a provisional partnership agreement or transaction.

Author: Patrick Curtis
Patrick Curtis
Patrick Curtis
Private Equity | Investment Banking

Prior to becoming our CEO & Founder at Wall Street Oasis, Patrick spent three years as a Private Equity Associate for Tailwind Capital in New York and two years as an Investment Banking Analyst at Rothschild.

Patrick has an MBA in Entrepreneurial Management from The Wharton School and a BA in Economics from Williams College.

Reviewed By: Josh Pupkin
Josh Pupkin
Josh Pupkin
Private Equity | Investment Banking

Josh has extensive experience private equity, business development, and investment banking. Josh started his career working as an investment banking analyst for Barclays before transitioning to a private equity role Neuberger Berman. Currently, Josh is an Associate in the Strategic Finance Group of Accordion Partners, a management consulting firm which advises on, executes, and implements value creation initiatives and 100 day plans for Private Equity-backed companies and their financial sponsors.

Josh graduated Magna Cum Laude from the University of Maryland, College Park with a Bachelor of Science in Finance and is currently an MBA candidate at Duke University Fuqua School of Business with a concentration in Corporate Strategy.

Last Updated:December 1, 2022

A non-binding "heads of agreement" describes the actual conditions of a provisional partnership agreement or transaction.

The HoA also referred to as a "letter of terms," is the first step toward a complete, legally enforceable agreement or contract.

Before any legally binding papers are created, it serves as a guide for the roles and obligations of the parties engaged in a proposed partnership.

Such a document is frequently employed in business transactions, such as the purchase of a company.

It is most frequently used in business contexts in Australia, New Zealand, and the UK.

An initial, non-binding contract, known as a "head of" agreement, lays out the fundamental parameters of a partnership or transaction.

The agreement is the first stage in making a formal deal, and because it is a tentative agreement, it is frequently reneged upon or renegotiated.

Although they are non-binding, other parts, including non-disclosure clauses, might not be.

The HoA document should serve as an introduction to the fundamental conditions of a deal or partnership. It takes place in the preliminary round of discussions.

It is intended to be less extensive to include all the information required for a legally enforceable formal agreement. However, its power lies in the fact that the parties are less likely to discover a point on which they disagree.

The following phase requires enlisting attorneys and accountants to work out the specifics once both parties have reached a broad agreement on a partnership or transaction and have signed the HoA form.

These specifics might include several prerequisites that must be met before a deal is finalized. 

The next step is the execution of a legally binding contract, albeit the heads of agreement may be canceled at any moment by either party subject to certain restrictions.

Example in Commercial Property Transaction

The agreement is sometimes referred to as the heads of terms in commercial real estate transactions in the UK. The heads of terms serve primarily to identify and emphasize the demands of the seller and the property buyer.

Using the heads of words has a variety of benefits. For instance, by doing this, both parties will completely understand what they are subject to, and any misunderstandings from either party can be reduced or eliminated.

Typically, the heads of words include the following details:

  • Information about the property seller and the property buyer
  • Address of the business building
  • Information about the business property
  • The transaction amount that all parties agreed upon payment details
  • Any unique circumstances
  • Transaction's due date

A written agreement that includes the terms expressly agreed upon by the parties is signed by all parties, and that demonstrates an offer, acceptance, consideration, and a desire to establish legal relations is likely to be regarded as a binding contract.

This is mainly because these contents meet the requirements of the Law of Property Miscellaneous Provisions Act 1989, Section 2.

The plaintiff may recover his costs in action for breach of contract for the sale of land, which is owed to the failure of the title without fraud, but not consequential damages for bargain's benefits loss.

The Bain v. Fothergill rule, sometimes known as the rule, was overturned.

Such actions no longer occur in registered land due to the Land Registration Act of 2002's title guarantee in situations where fraud has not been perpetrated or where the seller or transferor has not participated.

Like other fields of law, the buyer or recipient of land with valid title should be compensated as the court thinks fit, subject to specific binding precedent rulings. However, in the event of unregistered land, there should be a reasonable cap on damages.

According to this law, a contract for the sale or other disposal of an interest in land may only be made in writing.

It should also be made only after all terms the parties have expressly agreed have been included in either one document or, in the case of contracts exchanged, each.

Types and Components of heads of agreement

The agreement can include the following provisions for both parties to a transaction or partnership:

  • Proof that a deal is likely for both sides, so neither party wastes their time or money.
  • Norms for conducting formal agreement negotiations
  • A running list of terms agreed upon
  • Evidence that both parties are committed to a written agreement for lenders or investors.
  • A tool and rule for dealing with pre-contractual problems such as exclusivity, due diligence, intellectual property, and confidentiality.

Depending on the language used, it may be binding or non-binding, but they normally are not.

Nevertheless, other clauses, such as those relating to intellectual property, exclusivity, secrecy, and non-solicitation, tend to be enforceable—but only if the deadlines are reasonable.

It can cause issues if a document is created to be legally binding.

An HoA is not legally binding, although there have been instances where a court has ruled that it will be enforceable. It shall be deemed to have agreed on the following:

  • Indicate that the parties intended to be bound by the Heads of Agreement in clear language.
  • Designated as a "Heads of Agreement" and signed by both parties.
  • Drafted with the assistance of both parties' attorneys and containing all necessary terms and conditions.
  • Include a provision outlining the process for resolving any disputes.

The remedies for non-compliance by either party are few because most of the terms of the agreement are not legally enforceable.

In actuality, they only apply to the terms above that are enforceable. The opposite party may request an injunction, equitable remedy, damages, or specific performance if one party violates those contractual provisions.

Depending on the commercial transaction, it may include many things, but generally speaking:

  • Information of the parties which are involved in this transaction
  • The price or consideration
  • Key terms that are agreed upon by the parties
  • The intention is to work together and obtain a written agreement
  • Which kinds of provisions are meant to be legally binding
  • Any requirements that must be met before the final transaction takes place
  • The rights and obligations of each party
  • Clauses covering secrecy, exclusivity, intellectual property rights, and due diligence in front of a contract

Advantages

It primarily serves as a record for the initial exchange of information. However, it can also be used as a negotiating technique, which has many advantages compared to traditional oral negotiation.

A safe way to discuss important terms and conditions of a deal without being bound by any legal duties is to exchange a head of terms. It serves as a record for any negotiations as well.

Using the head of terms while forming a contract has several benefits:

1. Clear Communication

It documents the important terms of a transaction. Therefore, there is little possibility of miscommunication between the participants in this situation. 

It also acts as a record that may be used to track modifications made during the negotiation process.

2. Supporting Conditions

You can add important conditions to the contract using HoA.

For instance, a head of terms contract might contain exclusivity clauses that forbid either party from engaging in a similar transaction with a third party or a non-disclosure agreement to prevent information leakage.

3. Easy Documentation

The document serves as a document of record, as was already said before. Smart documentation is always beneficial because people have to look back every time they have to ensure something is in the negotiation process. 

Suppose some of the terms of the agreement are immediately binding, like a confidentiality agreement. A clear written record of the negotiations might benefit a legal dispute.

Additionally, hiring a lawyer is optional while creating a head of terms. As a result, it also saves money on legal fees before a formal contract is fully executed.

It is typically a non-binding agreement, as was already said. However, in some circumstances, the heads of the agreement document may have full or partial legal force. 

Any terms intended to be legally binding are typically expressed expressly in the head of terms.

How to Decide if You Should Enter HoA

First, you should consider its positive nature. It is an effective technique for the parties to negotiate important details of an agreement before signing a formal contract.

It enables the freedom to make a decision swiftly and back out if the contract terms cannot subsequently be reached. Negotiations usually proceed more smoothly as a result of this.

Key provisions in an HoA are typically not detailed, reducing misunderstandings between the parties and giving the parties greater freedom to negotiate the final contract details.

It can help parties avoid the effort and cost of creating a comprehensive and legally-binding contract.

When parties reach a final contract, the agreement serves as the deal's framework.

It is helpful to give a lender a Heads of Agreement if financing is required, which indicates that the parties plan to get into a formal contract so that neither party wastes time or money.

On the other hand, even if it may not have been the parties' goal, the most frequent danger associated with engaging in Heads of Agreements is that they are drafted in a way that makes them legally obligatory.

It is frequently drafted by parties who are not attorneys, which could have unpredictable results. As a result, there is uncertainty over the legal validity of the Heads of Agreement.

One side may be far more dedicated to entering a formal agreement than the other because it is non-binding.

If a party acts in reliance on a formal contract being entered into, the other party will not be entitled to any relief if that party chooses not to proceed or comply with the agreement.

Only when legally binding terms have been broken can remedies be offered.

Here are some tips for your decision:

  • Ensure the parties' information is accurately recorded, including their complete legal name and ABN/ACN.
  • Ensure the parties' authorized representatives have signed the HoA.
  • Consideration should be mentioned along with any other pertinent elements.
  • Nothing you are not willing to be held accountable for should be written in the Heads of Agreement.
  • Make sure that it identifies which are enforceable and which are not.
  • Language and words are crucial. Always get legal advice on its provisions and enforceability.
  • Please do not hesitate to contact Burke & Associates Lawyers' Property Team.

Difference Between HoA and MoU

Head of Agreement (HoA) and Memorandum of Understanding (MoU) differ primarily in their content and intended purposes.

An arrangement between two or more parties is called a memorandum of understanding. It indicates a common convergence of the parties' intentions and a planned course of action. 

It is frequently employed when parties must indicate a formal commitment or reach a legally binding agreement. An alternative to a gentlemen's consensus, it is more traditional.

Only the presence or absence of clearly stated legal components in the document's actual text determines whether it is a binding contract. 

Offer and acceptance, consideration, and the desire to be legally bound are necessary aspects. The specifics may vary slightly in the US if the contract is for products or services.

The differences between the two frequently need to be clarified. Both HoAs and MoUs are commonly used inappropriately.

HoA is a non-binding document that, when correctly designed, outlines the details of a potential agreement between parties.

They are signed before a formal contract. Outlining rights and obligations is a great tool for recording negotiations.

This agreement is later formalized through a contract. Alternative titles for the HoA include a gentleman's agreement or heads of understanding for a business lease. HoAs typically have a termination clause as well.

The following are included in HoA:

  • Information regarding the planned formal agreement
  • Both parties' obligations
  • Taking into account the planned agreement.
  • Options for including provisions requiring exclusivity, non-solicitation, intellectual property protection, and confidentiality.

MoUs serve as a record of the parties' goodwill. A preliminary pact is an MoU. An MoU outlines shared objectives and requirements for all parties involved.

An MoU may be used if the parties do not wish to suggest a legal commitment.

An MoU will often include information on the purpose of the agreement, the parties' roles, the duration of the partnership, any disclaimers, and any particulars regarding joint financial transactions. 

Additionally, MoUs typically do not have a termination clause.

What is covered by the MoU is:

  • Limiting how information is used
  • No copying of memos is allowed
  • Restrictions on liability
Key Takeaways

 

  • The basic terms of a partnership or transaction are outlined in an initial, non-binding contract known as a "head of" agreement.
  • The agreement, which is the first step in creating a legal deal, is frequently broken or renegotiated because it is merely a tentative arrangement.
  • The non-binding nature of agreement heads is generally accepted, but other parts, such as non-disclosure clauses, may not be.
  • The purpose of the heads of agreement document is to provide an overview of the basic terms of a deal or partnership. It happens during the first round of negotiations.
  • It is not meant to be comprehensive enough to contain all the details needed for a formal, legally binding agreement.
  • However, because the parties are less likely to find a point of disagreement, it also has a strength.

Researched & Authored by Xinyue Xu

Reviewed and edited by Parul Gupta | LinkedIn

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