Heads of terms: what to include and which parts are binding

What heads of terms are

Heads of terms, also called a letter of intent, a memorandum of understanding or a term sheet depending on the deal, are a short document recording what the parties have agreed in principle before anybody drafts the contract. They appear at the start of a business sale, a commercial lease, an investment round, a joint venture and most other deals of any size.

The idea is to settle the commercial points early, between the principals, so that the lawyers start from an agreed deal and the drafts reflect it.

What follows applies in England and Wales. Scots contract law does not use the subject to contract convention in the same way and has its own rules on when negotiations become binding, so heads for a Scottish deal need Scottish advice.

What to put in them

The content depends on the deal, and every set of heads should answer the same questions: who the parties are, what is being sold, let or invested in, for how much, paid how and when, subject to what conditions, on what timetable, and who bears the cost if it falls through.

On a business sale. Whether it is a share sale or an asset sale. The price, and whether it is fixed or adjusted by completion accounts for cash, debt and working capital. How much is paid on completion, how much is deferred, and whether any of it is an earn-out and on what measure. What warranties and indemnities the seller will give in outline, with any cap on liability and any time limit. Whether the seller stays on and for how long. Restrictive covenants on the seller. Any conditions, such as regulatory consent or a landlord's licence. Exclusivity and its period. Our guides to selling your business and buying a business deal with each side's position on those points.

On a lease. The premises, the term, break rights, rent and rent review, the rent deposit or guarantee, repairing obligations, permitted use, alienation, and whether the lease is inside or outside the Landlord and Tenant Act 1954 security of tenure provisions. The section on leases below deals with this in more detail.

On an investment. The amount, the valuation, the class of shares and their rights, board seats, consent rights, founder vesting and leaver terms, anti-dilution, and the conditions to funding.

Whatever the deal, include a timetable with dates for due diligence, first drafts and target completion, a statement of which clauses are binding and which are not, and a costs clause.

Subject to contract and why most heads are not binding

A contract is formed when there is an offer, acceptance, consideration and an intention to create legal relations, and it does not have to be signed or even written down. Heads of terms often contain all of those elements. The reason they are usually not a contract is that the parties have said they do not intend them to be one.

Marking the document subject to contract is how that is done. The words tell the court that the parties did not intend to be bound until a formal contract was executed, and the courts give the label real weight: an agreement reached subject to contract is understood to be a stage in negotiations, and either side can walk away until the formal document is signed.

The convention exists because heads are agreed before due diligence, before the warranties are drafted and before either side has found out what it does not know. A buyer who discovers a problem in due diligence needs to be able to renegotiate the price without being in breach of contract; a seller who receives a better offer during the process needs to know what walking away costs. Non-binding heads give both that freedom, and the binding clauses described next are the price of it.

The label should appear on the document itself, in the heading and again in a clause saying that, except for the clauses identified, the heads are not intended to be legally binding, and it should appear on the correspondence around them too.

The parts that are meant to bind

Four clauses are usually carved out of the non-binding statement and expressed to be binding contracts in their own right.

Exclusivity. The seller, or the landlord, agrees not to negotiate with anybody else for a defined period, commonly a number of weeks long enough to complete due diligence. A buyer spending money on investigation wants to know the seller cannot sell to somebody else while they do it. An exclusivity clause is enforceable as an agreement not to do something for a fixed period, provided the period is defined. An agreement to negotiate in good faith is generally too uncertain to enforce. The clause should therefore be framed as a prohibition on dealing with others for the period.

Confidentiality. Each side agrees to keep the negotiations and the information exchanged confidential, or the heads refer to the separate non-disclosure agreement that already does. Our guide to non-disclosure agreements sets out what a workable one contains.

Costs. Who pays what if the deal does not complete. The usual position is that each side bears its own costs, and a party that wants the other to contribute if it withdraws has to say so here and make it binding.

Governing law and jurisdiction. Which law applies and which courts decide any dispute about the binding clauses.

Each binding clause needs consideration to be enforceable as a contract, and where one party gives an exclusivity undertaking and the other gives nothing, the heads should be signed as a deed or a nominal payment recorded. The binding clauses should also state their own duration, since heads of terms are not usually terminated formally and the obligations otherwise run on indefinitely.

How heads become binding by accident

RTS Flexible Systems Limited v Molkerei Alois Müller GmbH and Co KG [2010] UKSC 14, decided by the Supreme Court on 10 March 2010, is the case to keep in mind.

Müller wanted RTS to supply and install automated packaging equipment. The parties signed a letter of intent in February 2005 and RTS started work on the strength of it, with a full contract on Müller's standard terms to follow within a few weeks. The draft contract contained a clause, clause 48, stating that it would not become effective until each party had executed a counterpart and exchanged it. The parties negotiated for months, reached substantial agreement on the terms by July, and never signed. In August they agreed a variation to the delivery arrangements without suggesting that the variation was itself conditional. The equipment was installed, the relationship broke down, and the question was whether there was any contract at all, and if so on what terms.

The Supreme Court held that there was a contract, on the terms the parties had agreed by July as varied in August. The requirement for signature and exchange had been waived by conduct. Lord Clarke put the principle in general terms: an agreement made subject to contract can become binding if the parties later agree to waive that condition, and they can do so by what they do as much as by what they say. Carrying out the work, agreeing variations and treating the terms as settled were enough.

The lesson for anybody using heads of terms is that the label protects the parties only while they behave as if they are still negotiating. Once one side starts performing and the other accepts it, the court will look for a contract, and it will find one in the document that was supposed to be non-binding.

Heads of terms for a lease

Property has a rule the rest of commercial law does not. Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 provides that a contract for the sale or other disposition of an interest in land can only be made in writing, incorporating all the terms the parties have expressly agreed in one document, signed by or on behalf of each party. A lease is a disposition of an interest in land, so an agreement to grant one is caught.

That rule cuts both ways. Heads of terms for a lease that were signed by both parties and contained all the agreed terms could, in principle, satisfy section 2, which is why property heads are marked subject to contract and drafted so that they never do. Conversely, an oral agreement for a lease, or an exchange of emails that does not meet the section, is no contract at all, which protects a landlord and a tenant from an argument that the agent's email closed the deal.

The RICS Code for Leasing Business Premises, first published as a professional statement in February 2020 and reissued in September 2023 as a professional standard, sets out what a landlord's or agent's heads of terms for a business lease should cover, and publishes a template and a checklist for the purpose. A tenant offered heads that leave out the break, the rent review basis, the repairing obligation or the position under the Landlord and Tenant Act 1954 should ask why, since the code expects those points to be settled at the heads stage. Our guide to commercial leases explains what each of those terms means for a tenant.

How much detail to put in

The right level of detail is the level at which nothing that would cause an argument later is left open, and nothing that is better negotiated in the contract is prematurely fixed.

Too little detail produces heads that record a price and nothing else. The parties then discover, weeks into the legal work, that they never agreed whether the price included stock, whether the seller's loan account would be repaid, or whether the lease had a break. Each of those is a negotiation that should have taken place between the principals and now takes place between the solicitors at hourly rates.

Too much detail produces heads that try to be the contract. Warranties drafted in full, indemnities set out clause by clause, and a completion mechanism written into the heads all take time to agree at a stage when the parties have not done due diligence, and they anchor positions that one side would rather revisit once it knows more.

A useful test is to ask, for each point, whether a reasonable person on the other side would say "you never told me that" if it first appeared in the draft contract. If yes, it belongs in the heads. If it is the sort of thing both sides expect the lawyers to work out, it does not.

How heads change the pace of a deal

Well drafted heads shorten a transaction because the first draft of the contract is prepared against an agreed structure. The solicitors know whether it is a share or asset sale, what the price mechanism is, how long the warranties run and what the conditions are, and the drafting reflects that from the start.

Badly drafted heads slow a deal down in two ways. Ambiguous heads become the subject of the negotiation, with each side arguing about what a sentence in them meant before anybody gets to what the contract should say. And heads that were signed without advice commit a party to positions it would never have agreed had it understood them: a seller who has agreed in the heads to an uncapped indemnity, or a tenant who has agreed to a full repairing lease of a building in poor condition, discovers that the heads are non-binding in law and binding in every practical sense, because the other side will treat any retreat as a renegotiation.

That is the real function of heads of terms. They fix the commercial shape of the deal by moral force, and moving off them afterwards costs goodwill, time and sometimes the deal itself. That is a reason to take advice before signing them, whatever the heading says about their legal effect.

The mistakes that cost the most

Signing heads prepared by the other side without reading them against the deal that was discussed, on the basis that they are non-binding anyway.

Leaving the exclusivity period open-ended, so that a seller is locked out of the market for as long as the buyer chooses to keep investigating.

Agreeing a price without saying whether it is adjusted for cash, debt and working capital, which on a company sale can move the figure by a large proportion of the headline.

Letting the buyer or the tenant start before the contract is signed, and then discovering, on the RTS principle, that the heads have become the contract.

And forgetting that heads of terms are the document the other side will hold up in every later disagreement. A point conceded there in a hurry will be the point that costs the most later, and the time to take advice is before it is conceded.

Frequently asked questions

Are heads of terms legally binding?

Usually not, because they are marked subject to contract and say that, apart from identified clauses, they are not intended to be binding. Courts give that wording real weight and treat the heads as a stage in negotiations. The exceptions are the clauses expressed to be binding, typically exclusivity, confidentiality, costs and governing law, and the situation in RTS v Müller, where the parties behaved as if the deal was on and the Supreme Court found a contract despite the absence of a signed document.

What does subject to contract mean?

It means the parties do not intend to be legally bound until a formal contract has been signed. The words signal that the document records where negotiations have got to, so either side can walk away or seek to change the terms before the contract is executed. The label should appear on the heads of terms and on the correspondence around them, and it protects the parties only while they continue to behave as if they are still negotiating.

Which parts of heads of terms should be binding?

Exclusivity, so the seller or landlord cannot deal with anybody else for a defined period while the buyer or tenant spends money on investigation; confidentiality, unless a separate non-disclosure agreement already covers it; costs, saying who pays what if the deal does not complete; and governing law and jurisdiction. Each should be expressed to be binding, given a duration, and supported by consideration or signed as a deed, since heads are rarely terminated formally and the obligations otherwise run on.

Can heads of terms become a contract by accident?

Yes. In RTS Flexible Systems v Molkerei Alois Müller [2010] UKSC 14 the parties signed a letter of intent, started work, negotiated a full contract whose terms required signature and exchange, never signed it, and later agreed a variation as if the contract existed. The Supreme Court held that a binding contract had come into existence on the agreed terms, because the requirement for signature had been waived by conduct. Starting to perform before the contract is signed is the most common way it happens.

Do heads of terms for a lease need to be in writing?

Heads of terms are a record of the deal and are not themselves the contract, so no form is required for them. What section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 requires is that any contract to grant a lease is in writing, contains all the expressly agreed terms in one document and is signed by each party. Property heads are marked subject to contract so that they never satisfy that section, and the RICS Code for Leasing Business Premises sets out what they should cover.

How detailed should heads of terms be?

Detailed enough that no commercial point capable of causing an argument is left open, and no more. Structure, price and how it is calculated, payment timing, any deferred element, the warranty position in outline, conditions, exclusivity and the timetable belong in the heads. Full warranties, indemnities and completion mechanics belong in the contract, where they can be negotiated once due diligence has shown what the risks are. Heads that contain every term of the deal risk being found to be the deal.

Should I take legal advice before signing heads of terms?

Yes, even though most of the document is non-binding. Heads fix the commercial shape of a deal by moral force, and moving off a point conceded in them is treated by the other side as a renegotiation. A seller who agrees an uncapped indemnity in the heads, or a tenant who agrees a full repairing lease of a building in poor condition, will find the concession hard to reverse. A short review before signature is the cheapest advice in the whole transaction.

Sources & further reading

• RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH and Co KG [2010] UKSC 14
• Law of Property (Miscellaneous Provisions) Act 1989, section 2
• RICS Code for Leasing Business Premises
• GOV.UK: selling your business, your responsibilities

This article is general information, not legal advice. The law changes and depends on your circumstances — always take advice on your specific situation before acting. Last reviewed 22 September 2026. AD Solicitors Limited is a recognised body regulated by the SRA (no. 8011228).