Heads of Terms in Commercial Deals – Are They Legally Binding?

September 3, 2024

Heads of Terms in Commercial Deals – Are They Legally Binding?

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By Rich Craven

When it comes to commercial deals, Heads of Terms (HOTs) can be key to ensuring a smooth transaction. Whether it’s buying or selling a business or an equity investment, HOTs outline the parties’ intentions and serve as a valuable tool during negotiations.

Our corporate law experts have outlined the benefits of using HOTs in commercial deals.

What are HOTs?

Also known as a Letter of Intent, Term Sheet or Memorandum of Understanding, HOTs is a document that sets out the key terms of a potential agreement between parties. In commercial transactions, HOTs are drafted early in the negotiation process to minimise misunderstandings and ensure that the fundamental aspects of the transaction are clearly agreed upon.

HOTs in M&A deals typically include the following:

• details of the parties and a description of the proposed transaction;
• price and payment mechanism;
• confidentiality and any exclusivity periods; and
• an outline of the timeframe for the transaction.

When are HOTs legally binding? Can I rely on them?

HOTs are not usually legally binding; however, their legal status will depend on the intentions of the parties and the specific language used. Often, the parties expressly state that some aspects of the HOTs are legally binding and enforceable but others are not. For example, it may be advantageous for the parties to stipulate that some terms such as confidentiality provisions are legally binding to prevent the details of the transaction being shared with others. It is important that the HOTs clearly state whether all or only certain provisions are intended to be legally binding or not.

Why use Heads of Terms if they are not binding?

HOTs serve as a valuable reference when drafting key commercial agreements, such as a share purchase agreement. They provide a foundation for the parties’ advisors, guiding them during the drafting and negotiation of the final agreement. HOTs also help keep the parties focused on the core issues and risks, streamlining the transaction process.

When do I need legal advice on HOTs?

HOTs are commonly used in most commercial transactions, but issues can arise if they are not drafted with sufficient clarity. Although HOTs are typically not legally enforceable, altering agreed-upon terms later can be challenging. Therefore, it is essential to seek expert legal advice before finalising HOTs. A legal professional can ensure that the document remains non-binding unless intended, and that all critical information is accurately included.

Do you require legal advice on drafting or negotiating HOTs? Contact Rich Craven, a member of our corporate and commercial team on 029 2082 9100 or rcraven@darwingray.com for a free initial chat to see how we can help you.