What Is a Head of Terms?

A head of terms (also called heads of agreement, a letter of intent, a memorandum of understanding, or a term sheet, depending on the context and jurisdiction) is a preliminary document that summarizes the key terms of a proposed transaction or commercial arrangement before formal contracts are negotiated and signed. For a deeper look at the negotiation process itself, see our guide to contract negotiation.

It serves several purposes:

• Aligns expectations – ensures both parties have genuinely agreed on the principal terms before investing in detailed legal drafting.
• Guides drafting – gives lawyers and advisers a clear brief for the formal transaction documents.
• Signals commitment – demonstrates that negotiations have reached a point where key terms are settled, which can help secure financing, board approval, or regulatory clearance.
• Creates momentum – a signed head of terms moves a deal forward and creates pressure to reach completion.

Binding vs. Non-Binding Provisions

One of the most important characteristics of a head of terms is that it is typically partly binding and partly non-binding.

Usually non-binding

The commercial deal terms (price, structure, conditions precedent, timelines) are usually expressed as non-binding in a head of terms. This means neither party is legally obligated to complete the transaction on those terms, and either party can walk away without liability (subject to any exclusivity clause).

This is intentional: detailed legal negotiation is still to follow, and the formal contract will be the binding document.

Usually binding

Certain provisions are typically drafted to be legally binding even at the head of terms stage:

• Confidentiality – both parties agree to keep negotiations and disclosed information confidential, regardless of whether the deal completes.
• Exclusivity – a commitment by one or both parties not to negotiate with third parties during a defined period while the deal is being finalized.
• Costs – whether each party bears its own costs or whether there is a cost allocation arrangement if the deal falls through.
• Governing law – the law applicable to the head of terms itself (especially relevant for international transactions).

The document should clearly state which provisions are binding and which are not, to avoid disputes about the legal status of the document. Understanding what makes a contract enforceable helps parties determine which provisions to designate as binding from the outset.

When to Use a Head of Terms

A head of terms is appropriate for:

• Mergers and acquisitions – recording the agreed price, structure (asset or share deal), conditions precedent, and exclusivity before detailed due diligence and contract drafting.
• Real estate transactions – capturing agreed rent, lease length, break options, and rent review terms before formal lease or sale documentation.
• Joint ventures and partnerships – setting out equity splits, governance arrangements, and business scope before the joint venture agreement is drafted.
• Significant commercial contracts – major supply, licensing, or services arrangements where the commercial terms are complex enough to warrant preliminary agreement before drafting.
• Investment and fundraising – term sheets for equity investment rounds, covering valuation, investment amount, rights, and conditions.

Key Sections of a Head of Terms

1. Parties

Identify the legal entities involved in the proposed transaction. Include their registered names and addresses.

2. Background and proposed transaction

A brief description of what the deal involves: what is being bought, sold, licensed, or agreed.

3. Principal commercial terms

The substantive deal terms will vary by transaction type but typically include:

• Purchase price or consideration – how much, in what form (cash, shares, deferred), and on what timeline.
• Transaction structure – asset deal or share deal; licensing or services arrangement; equity split in a joint venture.
• Conditions precedent – what must happen before the deal can complete (e.g., regulatory approval, board consent, due diligence satisfactory to the buyer, financing).
• Key warranties and protections – a summary of the principal warranties and any cap or basket on liability.
• Timetable – target dates for due diligence, contract exchange, and completion.

4. Exclusivity

A binding commitment by the seller or target not to solicit or negotiate with alternative buyers or partners during a defined exclusivity period. This is particularly important in M&A and real estate transactions.

Define:

• The length of the exclusivity period
• What constitutes a breach (direct or indirect solicitation, or accepting unsolicited approaches)
• Whether there is a break fee for breach of exclusivity

5. Confidentiality

A binding obligation covering:

• All information exchanged in the course of negotiations
• The existence and terms of the head of terms itself
• Duration of the obligation
• Permitted disclosure (e.g., to advisers who are themselves bound by confidentiality)

6. Costs

State whether each party bears its own legal and advisory costs. If there is a cost contribution arrangement (e.g., if the buyer withdraws after exclusivity), set this out clearly.

7. Non-binding statement

A clear statement on non-binding nature confirms that, except for the binding provisions (confidentiality, exclusivity, costs, governing law), the document does not constitute a legally enforceable commitment to complete the transaction.

8. Governing law

Specify the law that governs the head of terms, even if the formal contracts will be governed by the same or different law.

Common Mistakes in Head of Terms Documents

• Unclear binding/non-binding distinction – failing to specify which provisions are binding creates significant risk that the entire document, including the commercial terms, will be treated as binding.
• Missing exclusivity or too-short exclusivity – without exclusivity, the other party may continue talking to third parties throughout the negotiation.
• Vague conditions precedent – conditions such as “subject to satisfactory due diligence” without specifying what “satisfactory” means can create disagreements about whether a condition has been met.
• No confidentiality – publicly known negotiations can affect valuations, employee relations, and competitor behavior.

Who Should Use This Template

• M&A lawyers and corporate advisers drafting heads of terms for transaction clients
• Founders and business owners entering significant commercial negotiations or investment rounds
• Real estate professionals recording agreed lease or purchase terms before formal documentation
• In-house legal teams managing complex commercial negotiations

If you need a more formal preliminary document with binding effect, a Memorandum of Understanding may be appropriate:

Binding Memorandum of Understanding (MoU)

A Memorandum of Understanding (MOU) is a formal document that captures the intentions, expectations, and responsibilities of two or more parties collaborating. While it’s typically non-binding, an MOU acts as a written handshake, laying out the key terms of an agreement before moving into a formal contract. You’ll often see the MOU used in business deals, government projects, international relations, and research collaborations.

To make things even simpler, we’ve put together a Binding MOU template that takes the guesswork out of drafting. This template walks you through all the essentials, like party contributions, confidentiality, dispute resolution, and enforceable commitments, so you can start your partnership with confidence. Whether you’re launching a joint venture, teaming up for a project, or exploring a cross-sector collaboration, this customizable template is designed to help you set clear expectations, reduce risks, and build a strong foundation for whatever comes next.

contract Use template

Head of Terms Template

This head of terms template is ready to customize in fynk. Adjust the commercial terms, exclusivity period, conditions precedent, and binding provisions for your specific transaction, then send for signature.

With fynk, you can:

• Manage the head of terms alongside the subsequent formal contract in one record
• Set exclusivity period reminders to ensure formal contracts are progressed

• Track negotiation history and amendments in one place
• Send for electronic signature to confirm mutual agreement on the key terms

FAQs

What is a head of terms?

A head of terms is a preliminary document that records the key commercial terms agreed between parties before formal contracts are drafted. It aligns expectations, guides legal drafting, and signals commitment to the deal. It is also called heads of agreement, a letter of intent, or a term sheet.

Is a head of terms legally binding?

A head of terms is typically partly binding and partly non-binding. The commercial deal terms (price, structure, conditions) are usually non-binding. However, provisions such as confidentiality, exclusivity, governing law, and costs are typically drafted to be legally binding from the outset.

What is the difference between a head of terms and a letter of intent?

The documents serve the same purpose and the terms are often used interchangeably. 'Head of terms' is more common in UK and Commonwealth usage. 'Letter of intent' is more common in US practice. Both record agreed deal terms before formal contracts, with binding and non-binding provisions.

Should a head of terms include an exclusivity clause?

Yes, in most M&A and real estate transactions. Without exclusivity, the other party may continue negotiating with third parties while you invest time and money in due diligence and legal drafting. Exclusivity should be for a defined period, with clear consequences for breach.

What happens if a party withdraws after signing a head of terms?

Because the deal terms are usually non-binding, either party can generally withdraw without liability for the deal not completing. However, if exclusivity or a break fee clause is included, walking away during the exclusivity period may trigger a financial consequence. Confidentiality obligations also continue after withdrawal.