Heads Of Terms – Ivan Barry
With our upcoming Commercial Property Seminar taking place on Wednesday 4th February – here are some explanatory notes regarding Heads of Terms.
Heads of Terms – something we have all heard of but a term which for many often holds uncertainty as to content and purpose.
In the commercial arena it is very much more than a sales memorandum that just records the parties, their solicitors and the price.
The purpose of the Heads of Terms:
- To record the terms agreed between the parties
- to outline the main commercial aspects of the transaction which is contemplated. These are the points which are essential to the deal for the particular property.
- These are the main points of principle and the commercial matters which are involved. This aim is to allow for these important deal making terms to be identified before legal costs are incurred.
- To provide the framework for the parties and their legal advisers and other professional advisers to move forward to document the transaction and carry out all necessary due diligence so to complete the deal.
- To identify any issues in a transaction
- Assist in determining how the transaction will be structured and assist the solicitors for each party in drafting and negotiating the legal documentation.
HOT are not drafted in favour of one party or the other. That said, it is usual for the seller or the seller’s agent or solicitor to prepare the document for approval by the buyer and the buyer’s advisors.
A well prepared Heads of Terms is an invaluable document to solicitors as it will fully identify the issues but it will also not seek to fetter parties unnecessarily. It is a skill developed by surveyors and agents over time, to not only identify those items which should be in the Heads of Terms, as well as those to be omitted, but also the extent of which they should be commented upon.
As to content and scope, the minimum to be included will be:
- The identity of the parties, their agents or surveyors and their lawyers.
- The property being sold or purchased and if appropriate a plan so as to identify the extent of the property, an example would be where the property is being purchased forming part of a much lager estate. Often by reference to a plan.
- Whether the property is freehold or leasehold.
- The price, obviously a key point,
- The current permitted use for the property
- Whether VAT is applicable to the price or not, and if it is whether there is an intention for the transaction to proceed as a TOGC.
- It is also now usual for the Heads of Terms to make provision as to timing and the parties understanding of the timetable for exchange and completion
- Usually there is a provision as to legal costs, which is ordinarily that each party bears their own cost.
These are the usual Heads contained in the document.
I would also encourage both VAT & TOGC and Capital Allowances to be addressed at this early stage.
There will also be specific mention of any conditions attached to the transaction. For example, subject to planning provisions;
So in summary, the Heads of Terms document is critical to all commercial property transactions and the important points is that the document is prepared as intended to give an outline recording the points of principle and commercial matters as between the parties which then assist the solicitors as aide memoire to move through the transaction.
What is to be avoided is the Heads of Terms becoming an unwieldy lengthy document which results in the fettering of the parties.
There are some dangers as well. Whilst for the most part HOT are very useful they do have the potential to case problems.
- Over complex and detailed HOT can bring about a rigidity by one party and can result in the “moral high ground” being taken when there is a genuine issue which actually only results in delay and frustration for all.
- More importantly It is imperative that the Heads of Terms document does not become legally binding, they should always be stated as subject to contract, but even that phrase does not completely rebut the presumption of contractual intention in exceptional circumstances.
An example of such an exceptional circumstance was in the case of Proforce Recruit Limited v Rugby Group Limited. In that case from 2005 the High Court held that an agreement (albeit not a property contract), which was expressed to be subject to contract, constituted a binding contract after it was signed by the parties. For this reason care has to be taken with Heads of Terms document as to whether they bring about a binding position.
If you’d like further assistance in this matter please contact Partner, Ivan Barry by emailing him at firstname.lastname@example.org or call on 020 8567 3477