Heads of terms set out the main commercial terms of a deal before the full contract is drafted. Under English law they are usually not binding on those commercial terms, provided the document is marked “subject to contract” — but particular clauses, such as confidentiality and exclusivity, are normally intended to bind and do.
Almost every private M&A deal, investment or business sale starts with a short document recording what the parties have agreed in principle. Getting that document right takes an afternoon. Getting it wrong can cost you the deal, or commit you to something you did not intend.
What are heads of terms?
Heads of terms are a short written summary of the key commercial terms the parties have agreed, produced before lawyers draft the full transaction documents. They typically run to a few pages rather than a few dozen.
Their purpose is practical. They force both sides to confront price, structure and timing early, while it is still cheap to walk away. A deal that falls apart at heads of terms has cost both parties a meeting or two. A deal that falls apart after four weeks of due diligence and drafting has cost real money.
What else are heads of terms called?
The same document travels under several names, and the naming convention differs on each side of the Atlantic:
- Heads of terms — the usual UK term in private M&A
- Heads of agreement — used interchangeably in the UK
- Memorandum of understanding (MOU) — more common in joint ventures and institutional arrangements
- Letter of intent (LOI) — the standard US term, and what an American counterparty will almost always call it
- Term sheet — the usual term in investment and financing rounds on both sides
The label does not determine the legal effect. A document called a “non-binding letter of intent” can still create binding obligations if its contents and the parties’ conduct point that way.
Are heads of terms legally binding?
Generally, no — as to the commercial terms. Heads of terms evidence serious intent and carry real moral and commercial force, but under English law they will not usually bind the parties to complete the transaction.
That outcome is not automatic. Whether a document binds depends on the objective intention of the parties, the certainty of what has been written, and the circumstances surrounding it. A document that reads like a complete agreement, is signed, and is acted upon can bind its authors regardless of what they intended privately.
The practical protection is the phrase “subject to contract”.
What does “subject to contract” actually do?
Marking a document “subject to contract” signals that the parties do not intend to be legally bound until a formal contract is signed. Under English law it is strong evidence of that intention, and it is the single most important piece of drafting in the whole document.
Two cautions. First, the label is evidence of intention, not an impenetrable shield — conduct inconsistent with it can undermine it. Second, it is frequently omitted. A summary of terms emailed after a good meeting, without that label and without legal input, is where most of the trouble in this area starts.
Which parts of heads of terms are meant to bind?
In practice heads of terms are a hybrid document: mostly non-binding, with a small number of provisions that both sides intend to take effect immediately. Those usually are:
- Confidentiality — protecting what each side learns about the other during the process
- Exclusivity, or a lock-out period — the seller agrees not to negotiate with anyone else for a defined period
- Costs — who bears their own professional fees, and what happens if the deal aborts
- Governing law and jurisdiction — which law applies and which courts decide any dispute
- Non-solicitation — sometimes, where the buyer will meet the seller’s staff or customers
The document should say plainly which clauses bind and which do not. Leaving that to inference is the most common drafting failure we see.
What do heads of terms usually cover?
Beyond the binding provisions, a well-drafted set of heads typically records:
- The parties, and exactly what is being bought — shares or assets
- Price, and how it is calculated
- How and when the price is paid: cash at completion, deferred consideration, earn-out, or shares in the buyer
- Any retention or escrow arrangement
- Key conditions to completion, including any regulatory clearances
- The intended timetable
- What happens to key people after completion
- The broad shape of the warranties and any indemnities expected
How do US letters of intent differ?
The commercial function is the same, but the drafting culture is not, and this is where UK sellers negotiating with American buyers most often get caught out.
US letters of intent are typically longer and more explicit than UK heads of terms. Rather than relying on a “subject to contract” label, they commonly carve the document into expressly binding and expressly non-binding sections, and state in terms that no obligation to complete arises until definitive documentation is signed.
There is also a substantive difference worth understanding. English law has traditionally treated a bare agreement to negotiate in good faith as too uncertain to enforce. Some US jurisdictions take a different view, and have been willing to give effect to an express obligation to negotiate in good faith where the parties have clearly assumed one. An American counterparty may therefore attach more weight to language a UK party regards as a courtesy.
The practical point: do not assume a US-drafted letter of intent does what a UK-drafted set of heads would do, or that the governing law clause is a formality. On a transatlantic deal it is one of the most consequential clauses in the document.
What goes wrong with heads of terms?
- No “subject to contract” label, leaving the binding status of the whole document arguable
- No clarity on which clauses bind, so confidentiality and exclusivity are as uncertain as the price
- Exclusivity with no end date, or granted without anything in return
- Too much detail, turning a summary into a de facto contract the parties never negotiated properly
- Too little detail, so the same argument about price or structure resurfaces weeks later
- Silence on costs, so an aborted deal produces a second dispute about who pays
- Agreeing them without legal input, on the basis that they are “only heads of terms”
Do you need heads of terms at all?
For anything beyond the simplest transaction, yes. They establish momentum, they surface disagreement while it is still cheap, and they give you exclusivity and confidentiality at the point you are about to open your books to a competitor.
They are also where your negotiating position is strongest. Once heads are agreed and diligence has begun, the commercial gravity of the deal makes it progressively harder to reopen terms. What you concede at this stage, you generally keep conceded.
Related reading
M&A advisory services · What UK companies need to know before acquiring a US business · Selling your business to a US buyer · US commercial contracts
Frequently asked questions
Are heads of terms legally binding?
Usually not, as to the commercial terms, provided they are marked “subject to contract”. Certain clauses — typically confidentiality, exclusivity, costs, and governing law — are normally intended to bind and do. The document should state clearly which is which.
What is the difference between heads of terms and a letter of intent?
Largely terminology. “Heads of terms” is the usual UK expression and “letter of intent” the usual US one. US letters of intent tend to be longer and to separate binding from non-binding provisions expressly, rather than relying on a “subject to contract” label.
Can you withdraw after signing heads of terms?
Generally yes, where they are properly marked as non-binding on the commercial terms. But any binding provisions — an exclusivity period in particular — continue to apply, and withdrawing has commercial and reputational consequences even where it carries no legal ones.
Should a solicitor draft your heads of terms?
It is worth legal input before they are signed. Heads of terms shape everything that follows, contain the clauses that protect you during diligence, and are the point at which your negotiating leverage is at its highest. They are the cheapest stage of a deal at which to get advice.
How long should heads of terms be?
Long enough to record what has actually been agreed, and no longer. A few pages is typical for a private company sale. A document that starts to resemble the sale agreement itself has usually gone too far.
