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What are… Heads of Terms?

Heads of terms are often entered into at the start of a transaction to record the intentions of the buyer and seller. They are usually stated to be non-legally binding so that the parties can then negotiate the finer details as the sale progresses.

If the heads of terms (or HOTs) do contain some legally binding clauses, these will normally deal with confidentiality, exclusivity and costs.

The HOTs can be in the form of an agreement, or the form of a letter from one party to the other, indicating the terms upon which they are prepared to purchase, or sell. They can deal with what is to be purchased, the mechanics of how they will be purchased, and the timeline of the transaction. There is usually a clause requiring each party to act in good faith to try and complete the transaction within a reasonable amount of time.

Confidentiality is usually a legally binding clause, so that parties, in particular the seller, have recourse should the sale not complete and the buyer uses the information it has gained to its advantage.

Exclusivity gives the buyer some breathing space to progress with the transaction, in the knowledge that the seller isn’t dealing with other prospective buyers.

A costs clause can also be included to incentivise the parties to complete. In the event one party withdraws, that party may have to pay the other party’s costs.

HOTs are not essential but some buyers and sellers like them to set the scene of the transaction in the hope it makes the negotiation of the major transaction documents easier. Others prefer to just get straight to the main drafting.