Heads of Terms and Negotiations
A crucial early stage of many transactions is the heads of terms, also known as the memorandum of understanding, which are often attached to a letter of intent. Heads of terms are often used in significant commercial contracts and transactions and play a crucial role in the negotiation process.
Heads of Terms are commonly used as a stage during a commercial transaction, including:
- Business sales and acquisitions
- Funding Rounds and Investment agreements
- Joint ventures
- Licensing agreements
- Service agreements
- Supply agreements
- Franchise agreements
- Partnership agreements
What is the Purpose of Heads of Terms?
Heads of terms outline the key points of the deal before work starts on drafting the final contract but why are they important and how can they impact the outcome of your transactions?
Heads of terms are a document that outlines the intended main terms and conditions of a transaction. Typically heads of terms are not legally binding insofar as they describe the main elements of the transaction but they are used as a framework for the negotiation process and ensure that both parties are on the same page. Negotiating the heads of terms helps to identify any potential issues or areas of disagreement early on, allowing them to be addressed before the final contract is drafted.
Heads of Terms Protect both Parties
It is in the interests of each party, but particularly the weaker party, to ensure that the heads of terms are specific in relation to the elements that are important to it. Relying on heads of terms that say for example, an investment agreement or a sale and purchase agreement will be in the form of the other party’s ‘standard terms’ offers no protection at all.
The head of terms will outline the principal terms of the transaction, but these will not be legally binding, however some clauses are. The legally binding terms usually include confidentiality, a period of exclusivity and sometimes an agreement in relation to payment of each party’s costs.
When drafting heads of terms, it is important to be as specific as possible. This will help to avoid any misunderstandings or disputes and therefore wasted effort and money during the final contract drafting process. While it is important to be specific, it is also important to keep the language of the heads of terms as simple and as easy to understand as possible.
It is a good idea to involve your solicitors, and in some circumstances other professionals such as accountants, from the beginning of drafting or reviewing heads of terms. They can provide guidance on any potential legal and financial implications and, most importantly, ensure that the heads of terms contain sufficient detail to protect your interests when you negotiate the main contracts.
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