Commercial Property: The Heads of Terms

Where a transaction involves the grant of a new lease or an assignment of an existing lease, then the Heads of Terms will be prepared usually by the agents.

The heads of terms are used only in commercial transactions, and are effectively a short document in which all the main agreed terms are set out in a clear and concise form. There is no strict format for the heads of terms, and they can come in many different forms, from letters of intent to simple lists.

As the aim of the heads of terms is to highlight the main agreed terms, they usually consist of short headings followed by a brief description of the term.

Heads of terms can also be used throughout the course of a large and complex transaction, whereby a fresh one is drafted between each key stage of the transaction. This helps organise and maintain the agreed terms in a single location and thus helps keep the costs down.

Advantages

The advantages of using heads of terms can be as follows:

  • by creating a moral obligation on both parties to abide by the terms, they increase trust and confidence between the parties
  • they provide a clear and concise recording of the main terms and thus can highlight any ambiguities in the terms which the parties can then negotiate and make clear
  • they can help reduce the costs of using solicitors to negotiate the main terms
  • they can contain binding terms such as confidentiality in the event that the transaction fails
  • they can be used for informative purposes such as to provide information on the basic terms of the deal to outside advisers, investors or regulatory bodies. They can also be used to obtain quotes from solicitors where a party is looking for the best deal in legal services.

Disadvantages

There can also be some disadvantages to using heads of terms, some of which are listed as follows:

  • some terms can become legally binding, so a little is required here
  • once heads of terms are agreed in principle and the transaction has formally begun, it could reduce the chances of re-negotiating the terms
  • too much time can be spent on negotiating the heads of terms, defeating the object of the exercise
  • if the parties legal representatives are instructed to help negotiate the heads of terms, the costs of the transaction can escalate.

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Best Practice

Heads of terms can be a useful and powerful tool in negotiating the main terms of a commercial transaction. However, it is important that they are used sensibly and proportionally to the size of the transaction. Commercial property agents are very experienced in dealing with heads of terms, so it is advisable that they are consulted in the negotiation process. Once both parties are happy with the heads of terms, the legal representatives can be instructed to draft the legal documentation.

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