When you agree to buy another business, you will often start with a document called heads of terms (also known as a memorandum of understanding, heads of agreement, or term sheet). It records the main points you have agreed in principle, before lawyers draft the full contract. You do not strictly have to use one, but they are very useful, and the key question people ask is whether they are legally binding. The answer: mostly no, but partly yes.
What heads of terms do
Heads of terms set out the shape of the deal in a short document: who is buying and selling, what is being bought (shares or assets), the price and how it is paid, key conditions, and the proposed timetable. They help by:
- making sure both sides have a common understanding before spending money on lawyers and due diligence;
- giving a framework for the detailed contract; and
- flushing out deal-breakers early.
Are they binding? Usually "subject to contract"
As a rule, heads of terms are not intended to be legally binding as to the main commercial deal, they are a statement of intent. To make this clear, they are normally marked "subject to contract", which signals that no binding agreement exists until the formal contract is signed. Without that label, there is a risk a court could find that some terms were intended to bind, so the wording matters.
The parts that usually are binding
Even in a non-binding document, certain clauses are deliberately made binding, because the parties need them to have effect during negotiations:
- Confidentiality, protecting sensitive information shared during the process.
- Exclusivity (lock-out), the seller agrees not to negotiate with other buyers for a set period. For this clause to be enforceable, it must satisfy normal contractual requirements: it needs consideration and a fixed or clearly ascertainable duration. A vague or open-ended lock-out clause may not be enforceable.
- Costs, who bears their own costs if the deal falls through.
- Governing law and jurisdiction for the heads of terms themselves.
A well-drafted document states clearly which clauses are binding and which are not.
Why clarity matters
The biggest risk with heads of terms is accidental binding (or accidental non-binding). If the document is ambiguous, you could find yourself bound to something you thought was provisional, or unable to rely on something you thought was agreed. Spelling out the binding/non-binding split avoids disputes.
Practical tips
- Use heads of terms for any significant business purchase, they save time and cost later.
- Mark the commercial terms "subject to contract".
- Make confidentiality and exclusivity expressly binding; for exclusivity, state a specific period and ensure the clause is supported by consideration.
- Keep them concise, detail belongs in the full agreement.
- Have a solicitor prepare or review them before signing.
Key takeaways
- Heads of terms are not compulsory but are highly useful when buying a business.
- They are generally not legally binding on the main deal, mark them "subject to contract".
- Certain clauses (confidentiality, exclusivity, costs) are usually made binding deliberately.
- Clear wording on what binds and what does not is the key to avoiding disputes.
Sources
- English contract law on intention to create legal relations and "subject to contract"
- Common use of binding confidentiality and exclusivity (lock-out) provisions in heads of terms
--- This article is general information about the law of England & Wales as at 2026, not legal advice. For advice on your circumstances, consult a qualified solicitor.