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Heads of Terms

The article below follows on from our series of seminars for Junior Land Buyers. Click here to read the previous article.

Heads of Terms set out the terms of a transaction and will be used as a guide by your solicitor in drafting the documents. They will also be referred back to as a point of reference throughout the transaction to ascertain what the terms of the deal are.

Some heads of terms are more detailed than others but the key is to make sure you aren’t agreeing to anything within the heads of terms which you do not understand or are unable to deliver on. We are always on hand to offer advice in relation to heads of terms and a few points to look out for are set out below:

  • Parties' Details – These should detail who will be a party to the transaction. You will need to ensure you are happy with the financial strength of the party you are contracting with, particularly where payments may be made on a deferred basis or a party is carrying out works.

Particular care should be taken where companies are set up for an individual transaction. Whilst they may form part of a wider group of companies you will not have the benefit of a guarantee from any other companies within the group without the other parties being a party to the contract. If you are concerned about the financial strength of the proposed contracting party it would be best to work out what security you would require for the works/payments and specify this within the heads of terms. There are various types of security which could be offered including escrow accounts, guarantees and bonds.

  • Transaction - The heads of terms should set out the details of the transaction and what the parties are looking to achieve. This should just be a brief overview of the transaction and set out if it is leasehold or freehold, the type of agreement to be entered into e.g. option, conditional contract or outright sale agreement.
  • Endeavours obligations - Be careful of the wording with endeavours obligations as some are more onerous than others. Best endeavours is the most onerous, meaning that you must do everything within your power (whatever the cost) to make sure you comply with the obligation.

All reasonable endeavours is still onerous but also should be avoided. Its meaning is uncertain but it may still require you to sacrifice your commercial interests to comply with the obligation.

The least onerous is a reasonable endeavours obligation and requires you to take a reasonable course to achieve an objective. This will not normally mean you having to sacrifice your commercial interests. You will see other endeavours obligations such as reasonable commercial endeavours but these have not yet been tested in the courts so their meaning is uncertain.

  • Planning - Where a deal is subject to planning, be clear on the types of application you are able to seek and what will constitute a satisfactory planning consent. Make sure you are not obliged to purchase until a consent is free from third party challenge and that you have time to consider if a consent is satisfactory or not taking into account your internal requirements.
  • Overage - If your deal is to include overage it is best to set out the parameters of the overage within the heads of terms. It is also useful to include some worked examples.

In order to ensure you are only paying overage if you are benefitting from a consent you would typically be seeking for it to only be paid once you had obtained a planning consent and were either selling the property or implementing the consent. You would also need to ensure the provisions were released ideally when the overage payment was made or if it is an on-going overage obligation when your dwellings sold.

  • Additional Provisions - It is best to set out any works obligations or other transaction specific requirements in the heads of terms. If you have internal requirements to meet in order to proceed then these should also be taken into account in agreeing proposed timescales within the heads of terms.
  • Signing - We would not normally recommend signing heads of terms. If you are required to sign them make sure they are stated to be “Subject to Contract” in order to avoid any question as to whether a binding agreement has been entered into.

For more information on this article, please contact Lola Skuse.

Ashfords run a series of seminars for anyone involved in the world of real estate development who would like to learn more about the legal process behind the deals. The seminars are led and organised by our team of residential development solicitors, providing an opportunity to share knowledge and build lasting connections in an informal and friendly environment. Here are a list of future seminars for Junior Land Buyers, please let us know if you would like to receive notification of these events.

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