What is a ’Heads of Agreement’?

If you have entered a lease or commercial contract, you are likely to have heard the term ‘Heads of Agreement’ before. The Heads of Agreement (“HoA”) is a prudent and useful document that outlines the important and agreed upon terms of the contract or lease.

The primary idea behind an HoA is that it encapsulates the entire agreed terms of the commercial transaction and allows for the legal representatives to prepare the relevant documents to finalize the matter.

What should an HoA include?

As the HoA provides a framework of what the parties are to expect before entering into a formal contract with the other party, it is important that it includes all the key terms and conditions that form the agreement.

It may include.

• Key dates of the agreement such as the commencement date, rent-free period, etc.
• Financial terms such as the rent, purchase price, deposit, etc
• Background and details of the transaction for example premises address, type of business and party’s details, etc;
• Costs and expenses such as who is responsible for the cost of the documents etc.

The HoA should also contain a clause that will dictate whether the HoA is binding or non-binding.

Is an HoA Legally Enforceable?

A HoA is generally not intended to be binding on the parties involved. This means either party can elect to discontinue the agreement with little to no ramifications.  This is one of the biggest misunderstandings of an HoA, people think it is binding.

It is prudent to include a clause in the agreement that will state the agreement is not legally binding to avoid potential disputes. Additionally, despite the non-binding nature of the HoA, it is possible to have certain clauses binding on them if they elect, for example, the parties may wish to have a confidentiality clause legally binding on them.

What are the benefits?

The benefits of a HoA are:

• Parties can walk away from the agreement without any real and substantial ramifications.
• The HoA can allow parties to further consider committing to the agreement and to obtain third-party advice on the transaction.
• Assist in progressing the transaction to finalization as there is already an agreement on the key terms prior to drafting.
• Records the intention of the parties prior to entering into the agreement.

Risks associated with the HoA

Like any agreement between parties, the HoA is not without risk. The HoA can create conflict at the drafting stage of the agreement.

The HoA is usually negotiated and decided upon prior to any involvement of legal representatives. As such, it is often the case that after parties have obtained legal advice, the terms and conditions initially agreed upon require changing. If there is a disagreement between the parties as to the change or one party persistently relies on the terms of the HoA, the commercial transaction may fall apart.

To avoid crashing a deal, we recommend seeking third-party advice from an agent, solicitor, or accountant prior to committing to a HoA, especially where it includes the intention for the parties to be bound legally by the terms.