Heads of terms in business transactions

Heads of terms are also known as letters of intent, memoranda of understanding, term sheets or heads of agreement, and are generally contained in a short document outlining the main terms of a commercial transaction agreed between the parties in principle.

It is possible to distinguish between different forms of heads of terms, including:

• "Term sheet" type documents, which provide evidence of serious intent and have some moral force, but generally do not contractually require the parties to conclude the deal on the terms outlined in the heads, or even at all. Their intention is effectively to outline key terms agreed in principle, to give the parties a structured basis for negotiating the main contract. They are generally intended to be non-binding as a whole, but will often include some provisions that are intended to be binding.
• Documents that are intended to be binding in their entirety (and are therefore effectively a temporary, interim agreement). These are most often used to cover the situation common to many industries where the parties start to incur costs or perform the contract before the final contract is agreed, for example, leasing of equipment or warehousing. In this situation, the heads of terms will assume greater importance and additional considerations will apply.

There is no standard form for heads of terms; they can vary from a simple letter (probably the most common format) to a carefully drafted document prepared by professional advisers. They are commonly entered into at the beginning of a transaction, once the parties have agreed preliminary terms and before the definitive agreements are drafted (which is when the parties begin to incur significant costs). The parties may need to enter a series of heads of terms throughout the negotiations, particularly when negotiations are prolonged.