Clients like to think a deal is effectively done when heads of terms are signed, and many agents encourage their clients to enter into such a document before the legal teams are instructed. Indeed, if the new RICS Lease Code for Commercial Property comes into force, RICS accredited surveyors will insist on heads of terms when a property is being let with vacant possession, as otherwise they will fail mandatory practice standards.
Used effectively, heads of terms can flush out potential areas of disagreement early on, broker a compromise and avoid a deal cratering over the issue later, with consequent, expensive wasted costs. Good heads of terms can also speed the deal up, because the solicitors draft the real contractual documents (agreement for lease, lease, sale contract, overage etc) based on the heads of terms, rather than turning out a standard template and waiting for the other side to amend it.
However, clients need to be realistic. No heads of terms are ever comprehensive. If they were, they would take as long to negotiate as the contractual documents. More importantly, as heads of terms are not contractually binding, either party can resile from some or all of the agreed principles at any point. Investing extra time, effort and cost in making heads of terms even more comprehensive is not necessarily worthwhile. It may also backfire, because the more detailed the heads of terms appear, the greater the expectation that nothing new will be introduced into the deal. If the solicitors discover that there are missing elements, or that the agreed principles don’t work properly or ignore a relevant factor (eg adverse tax consequences, restrictions in the title deeds), they may encounter resistance to additional drafting to deal with those.
Here are our suggestions for a pragmatic approach to heads of terms: