The heads of agreement, also known as the head of terms, is a document summarizing the terms of a proposed agreement like a property sale, partnerships, joint ventures, etc. Typically, a heads of agreement is non-binding, which means that neither party is obligated to agree to the terms listed in the document.
The heads of agreement is similar to other such documents like the letter of intent or memorandum of understanding. The purpose behind these documents is to express the interest of both parties to enter into an agreement. Such documents are prevalent at all levels of legal agreements, from contract law between individuals to international law between sovereigns.
Heads of Agreement in Common Law
In Canada, the equivalent of the heads of agreement is the letter of intent. The Canadian legal system recognizes two types of letters of intent: the weak letter of intent and the strong letter of intent.
Weak Letter: The weak letter expresses intent to enter into a transaction but does not express an active interest to proceed with the transaction.
Strong Letter: The strong letter expresses an active interest that a party is willing to enter into a contract. It is more detailed than a weak letter and states the terms of a contract more explicitly.
The difference between the two letters is that a strong letter can be considered binding to a degree. A head of terms is common practice in other English common law jurisdictions, like the United Kingdom, Australia, and New Zealand. For example, in the United Kingdom, it is common practice to include a head of terms with real estate transactions, such as buying land or a house.
In the United States, any letter of intent does carry much weight. Hence, the heads of agreement may not hold up in a court of law.
The next sections include a template of head of terms for a property sale and go over some characteristics of the document.
Purpose and Nature
The heads of agreement primarily act as an initial communication document. It also serves as a tool for negotiation. Exchanging a head of terms is a safe way of discussing key terms and conditions of a deal without any legal obligations. It also serves as a document of record for any negotiations.
There are various advantages to using the head of terms while entering a contract:
1. Clear Communication
A heads of agreement puts key terms of a transaction to paper. In such a way, there is little room for misunderstanding between parties. It also serves as a document of record that can help track changes through the negotiation process.
2. Supporting Conditions
A heads of agreement can also be used to place certain essential conditions to the contract. For example, a head of terms document can include a non-disclosure agreement to prevent information leakage or exclusivity terms, which prevent either party from conducting a similar transaction with a third party.
3. Easy Documentation
As stated above, a heads of agreement document acts as a document of record. A clear written record of negotiation can help in a legal conflict, especially if some parts of the agreement are immediately binding, such as a confidentiality agreement. Further, it is not necessary to involve a lawyer while drafting a head of terms. Hence it also saves on legal fees before signing a full-fledged formal contract.
As stated above, a heads of agreement is usually a non-binding agreement. There are cases where a heads of agreement document can be entirely or partially legally binding. Usually, any terms that will be legally binding are explicitly stated in the head of terms.
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below: