What are Commercial Heads of Terms?
20 September 2019
In a nutshell, commercial heads of terms are a number of key points that both the purchasing and selling party agree on during the sale or letting of a commercial property.
They usually include:
- Details of the buyer and seller of the property
- Details of the commercial property
- The purchase price both parties have agreed to
- Any special conditions included in the sale
- Proposed transaction completion date
Why are heads of terms needed?
Commercial property transactions can be complex, and when trying to balance the stress of running a business whilst going through this process, things can become confusing. For many businesses, having clarity of what both the purchasing and selling party require at the outset of the process can guarantee a much smoother journey for both parties.
In this article, we will take a closer look at what heads of terms are, what they cover and the benefits and potential pitfalls of them for your business.
What Do Commercial Heads of Terms Cover?
Heads of terms are essentially a number of key points both the purchasing and selling party agree on ahead of the transaction. In most cases, heads of terms will be initiated by the buyer, as in many cases, they will be keen on ensuring that the price of the property does not change once a fee has been agreed.
Whilst there is no standard form for heads of terms, they are usually written up in the form of a simple letter but can be sent as a carefully drafted document. In almost all cases, you will find that a heads of terms document is drafted by a legal professional, but the document itself is not actually legally binding itself.
The only element of a heads of terms contract which a buying party would potentially want legally binding is granting exclusivity on the purchase of the commercial property; therefore, when an agreement in price is made, the heads of terms document will compel the seller to only proceed with the agreed purchaser from that point on.
In most cases, heads of terms usually include the following details:
- Details of the buyer and seller of the property
- Details of the commercial property
- The purchase price both parties have agreed to
- Any special conditions included in the sale
- Proposed transaction completion date
Heads of terms are used for a number of purposes, listed below are some of the key ones:
- As written confirmation of the main terms agreed in principle between the buyer and seller
- To outline the timetable and obligations of the parties during the negotiations period
- Used as a framework for some preliminary legally binding clauses, such as exclusivity agreements
Pros and Cons of Heads of Terms
The most significant benefit of putting in place heads of terms is that all parties involved are clear from the outset of the process, that an agreement has been reached with regards to key commercial areas. Whilst this clearly is no legally binding obligation on either party to complete a sale, the heads of terms will have significant moral force if either party breaks the agreement in principle, without good reason.
Along with this, commercial heads of terms can also be used as a framework for the parties advisers to work from in drafting and negotiating the sale and purchase agreement – this can save your solicitors time, and potentially save you money during the buying process. When agreed swiftly, heads of terms have the potential to significantly speed up the commercial property transaction as they add an element of clarity and focus to the property sale from the outset of the process.
On the other hand, whilst it can be beneficial to have a clearly stated moral agreement in place, this does leave little room for negotiation as the commercial property transaction process wears on. For example, throughout the process the buying party will begin to learn more about the property from external surveys and this may highlight fundamental flaws within the purchase – having a heads of terms in place in this instance may put the buyer at a disadvantage as the moral force of the documentation can make it difficult to negotiate the previously agreed fee without good reason.
Finally, it’s vital that the buying and selling parties do not get too caught up in drafting up and agreeing on heads of terms before the sale process has even begun. Heads of terms are supposed to be a simple and effective way of ensuring that both parties are on the same page at the outset of the purchasing process and shouldn’t draw out into lengthy negotiations as this can become costly for both parties.
If you are looking for a reliable and experienced commercial heads of terms solicitor, be sure to get in touch with the team here at Curtis Law. Our in house commercial property solicitors are capable of giving you sound advice throughout your purchase or sale, so please feel free to get in touch with our team by calling 01254 297130 or via our simple enquiry form below and our friendly experts will be more than happy to assist you.