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Heads of Terms and Due Diligence

Two very important concepts for a seller or purchaser of a business to understand are heads of terms and due diligence.

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Heads of Terms and Due Diligence

Heads of terms are an important part of any commercial transaction. They formalise the main points that you and the other party agree to. It is vital to seek professional legal advice when negotiating and drafting heads of terms to ensure you are very clear about what is expected of you and the other parties.

At Ironmonger Curtis, our expert commercial solicitors advise clients on heads of terms, and due diligence, and the possible different approaches to take. We will explain the legal consequences to you clearly and help you negotiate the most beneficial terms. If you require expert legal advice on heads of terms, contact our commercial lawyers today.

What are Heads of Terms?

Before entering into a formal agreement, to purchase a business for example, it is quite common for the parties to agree a number of key points known as the heads of terms.

The heads of terms will normally cover areas such as:

  • the purchase price;
  • whether or not the purchase price is to be paid in full on completion or payable in instalments;
  • an approximate timetable to work to;
  • a period of exclusivity under which the seller agrees not to market the business; and
  • the buyer’s right to carry out due diligence and a duty of confidentiality between the parties.

Are Heads of Terms legally binding?

Under English law, you cannot have an agreement to agree and, therefore, the heads of terms are not, generally speaking, legally binding on the parties. However, this does not prevent legally binding clauses being inserted. This means that caution should always be taken when negotiating and agreeing on heads of terms.

Examples of legally binding terms

The duty of confidentiality and period of exclusivity can be legally binding on the parties even if the transaction does not go through.

The heads of terms may also contain a provision which is legally binding on the parties that if the buyer pulls out of the transaction for no good reason, then the buyer shall pay the seller’s costs and expenses

they have incurred to date. One legal problem with this is the subjective nature of the phrase “good reason” – for a buyer and seller this will often mean something different. As a way of combating this, some buyers will insist that the same clause applies to the seller, who if they pull out without good reason will be liable for the buyer’s costs and expenses. It is, therefore, vital to take proper advice on the preparation of heads of terms.

What is Due Diligence?

Due diligence is a process used by buyers to raise pre-contractual enquiries with the seller about the business. They are usually quite lengthy and take the form of a questionnaire and the production of copy documents. For the seller, it can be seen as a long and laborious process, but the replies to the enquiries may form the basis for warranties in the Sale Contract, and there may well be a specific warranty as to the accuracy of those replies. Therefore, if they are not answered truthfully and correctly, not only does it make the buyer very wary but it could enable the buyer to bring a breach of warranty claim and/or a claim for misrepresentation. For the buyer, it flushes out any problems from an early stage and usually forms the basis of the disclosure process for the seller.

Do I need a solicitor for drafting Heads of Terms?

It can be tempting to quickly agree the terms of the sale in order to get the transaction moving. However, this can cause you significant problems further down the line, particularly if a large deposit is involved. While heads of terms are not necessarily intended to be binding, they can create legal obligations without your intention or knowledge. That is why it is beneficial to get specialist advice before entering into an agreement. Your solicitor will explain each term and its consequence clearly so you know exactly what you are agreeing to.

Contact the Commercial Property team at Ironmonger Curtis on 0845 222 2635.

For business law advice call 0845 225 2635

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