What is a Heads of terms agreement
Heads of terms are a document that outlines the details relating a commercial property transaction between two parties and they are typically negotiated and drafted by solicitors. Heads of terms are also referred to as a HOTS, Memoranda of Understanding (MOU) or Letter of Intent (LOI).
Although the heads of terms are not legally binding, they are used as a draft of the final contract. Furthermore, it has been known the court may consider certain aspects of the document legally binding and enforceable.
Heads of terms purposes
The main purposes of the heads of terms are for both parties (i.e. landlords and tenants) to understand what is expected and required from them during the period that applies, as well as avoiding any misunderstandings of information from either party.
Another benefit of drafting a heads of terms agreement is that it can speed up the transaction process by providing both parties clarity at the outset.
Heads of terms can include legally binding lock-out agreement/clause, which prevents the sellers/ landlords from negotiating with any other party for a given period of time. This is also known as ‘exclusivity agreement’.
This clause can help both parties take their time to fully understand and negotiate carefully the terms involved without feeling pressured by a worry that they could be negotiating with someone else.
What should be included in the heads of terms
There are a number of points that are essential to be covered by the heads of terms. These include:
- Agreement details
- Details of both parties
- Proposed commercial property lease/sale completion date
- Agreed lease/purchase price
- Payment information – including method and currency
- Both parties’ obligations