Heads of Terms

Deals such as business sales, leases and partnerships take time to document, and heads of terms record the key commercial points early as a short record of a proposed deal before the detailed contract is written. Depending on context, parties may call the document a term sheet, letter of intent or agreement in principle, but the label alone does not settle legal effect.

It helps people see whether they agree on the main commercial choices before spending heavily on legal drafting and diligence. A business-sale document might state the buyer, seller, proposed price, whether shares or assets are being bought, expected funding, target completion date and major conditions, and it may flag working-capital adjustments, earn-outs, approvals and due diligence.

A lease document needs a different list: premises, rent, term, break rights, permitted use, fit-out and repair terms. The right level of detail is enough to expose the important choices without pretending the final contract has already been negotiated.

The parties should say clearly which provisions they intend to bind them now and which are only a negotiating outline, since confidentiality, a period of exclusivity, cost sharing and governing law are sometimes binding even when price and completion are not. A UK legal commentary from B P Collins describes this split, while RICS warns that conduct and wording can affect whether an apparent nonbinding outline is treated as binding.

Local law and the whole document control, not an automatic rule that every heads of terms is harmless. A buyer may request exclusivity so the seller does not negotiate with competitors while the buyer pays for diligence, and the duration, start, end and exceptions should be explicit, along with what each party may still do.

Do not calculate a contractual end date merely by adding 60 days to 1 March without agreeing whether the signing day counts, what timezone applies or when the period expires. Write the actual calendar date and time in the binding clause.

Confidentiality can protect financial statements, customer lists and deal discussions, and it should specify permitted recipients, use, return or deletion, and any existing non-disclosure agreement. A term sheet does not itself give the buyer permission to contact employees or customers, so put contact protocols in writing so diligence does not disrupt the business or leak an unannounced deal.

If a price is described as an enterprise value, ask how cash, debt and normal working capital will affect the equity payment, and if it is expressed as a fixed amount, clarify assumptions about liabilities and assets included, because two sides can both believe they agreed a headline number while expecting different closing proceeds. Mark unresolved points rather than inserting words that make the document appear settled, and acknowledge dependencies such as regulatory consent, landlord approval, financing or a third-party waiver, since a target completion date is a planning milestone unless the parties make it binding.

Name the next steps, who leads them, and any expected decision date, which avoids a document that records an attractive price but gives no route to a signed contract. In an illustrative contrast, Summit Clinics, an invented buyer, began drafting an acquisition contract before deciding how the practice's debt and working capital affected price, whereas on a later fictional deal the parties wrote the price mechanism and outstanding issues in heads of terms first, which focused the drafting without promising lower costs in every transaction.