Head of Terms are also known as letters of intent, memoranda of understanding, heads of agreement, letters of potential interest, term sheets or protocols. Heads of terms are commonly entered into at the beginning of a transaction, once preliminary terms have been agreed and before commencement of detailed due diligence and the drafting of definitive agreements
The purpose of Heads of Terms
Heads of Terms set out the terms of a commercial transaction agreed in principle between parties in the course of negotiations. Heads of terms are used to provide evidence of serious intent but do not legally compel the parties to conclude the deal on those terms or even at all.
Heads of Terms are used for a number of purposes:
- As written confirmation of the main terms agreed in principle.
- To outline the timetable and obligations of the parties during the negotiations.
- As a framework for certain preliminary legally binding clauses such as an exclusivity agreement, where such an agreement is permitted
The parties involved may enter into a series of heads of terms throughout the negotiations, particularly when negotiations are prolonged.