What Is a Heads of Agreement?

What Is a Heads of Agreement?

Let me explain what a heads of agreement is—it's a non-binding document that lays out the basic terms of a potential partnership or transaction. You might also hear it called heads of terms or a letter of intent. This document is your first step toward a full, legally binding agreement or contract, and it serves as a guide for the roles and responsibilities of everyone involved before any official papers are prepared. I see it used a lot in commercial deals, like when someone is buying a business.

As a term in business, heads of agreement is something you'll encounter most often in Australia, New Zealand, and the United Kingdom.

Key Takeaways

Here's what you need to know: A heads of agreement is that starting non-binding document that sets up the basic framework for a partnership or transaction. It's the initial move toward a formal deal, and because it's tentative, it can often be renegotiated or even walked away from. Remember, though, that while the whole thing is generally non-binding, some parts—like nondisclosure clauses—might actually hold up legally.

Understanding a Heads of Agreement

You should understand that a heads of agreement is only intended as an introductory piece to the basic terms of a transaction or partnership. It comes into play during the pre-contractual stage of your negotiations. By design, it won't cover every detail needed for a binding formal agreement—that's not its job. But that's also why it's useful; with fewer details, you're less likely to hit on points of disagreement right away.

Once you and the other party reach a general consensus and sign this document, the next thing is to bring in attorneys and accountants to hash out the specifics. Those details could include pre-conditions that have to be met before finalizing anything. After that, you move to signing a binding contract, but keep in mind that either side can terminate the heads of agreement at any point, with a few exceptions.

Heads of Agreement Purposes

A heads of agreement gives both parties in a transaction or partnership some key benefits. It provides evidence that a deal is probable, so you don't waste time or money chasing something unlikely. It offers guidelines for negotiating the formal agreement and keeps a running list of terms you've agreed to. Plus, it acts as proof to lenders or investors that both sides are serious about moving to a formal deal. Finally, it's a tool for tackling issues like confidentiality, due diligence, intellectual property, exclusivity, and other matters that come up before the contract.

Heads of Agreement: Binding or Not?

Heads of agreement can be binding or non-binding based on the language you use, but they're not generally binding. That said, certain parts—like intellectual property protections, exclusivity, confidentiality, and non-solicitation—often are binding, as long as the time frames make sense. If you write the document to be fully binding, that can create issues down the line.

Since most of a heads of agreement isn't binding, there aren't many remedies if one party doesn't comply. Those remedies only kick in for the legally binding parts I mentioned. If there's a breach there, the other party could seek an injunction, equitable relief, damages, or specific performance.