Heads of Terms (“HOTS”) are, as the name suggests, the main terms of agreement reached between parties to a proposed transaction, which they seek to set down in writing.
What types of property transactions require HOTS?
There is no definitive rule as to when HOTS are required but the more complicated the transaction, the greater the need for the parties to set down a framework of the terms agreed between them.
As a result it is usual for there to be HOTS prior to the grant of a new commercial lease. Similarly HOTS are commonly used in more complex sales and purchases and developments and in the case of the grant of other interests in land such as options.
What advantage is there in preparing HOTS?
- Enables the parties to formulate the fundamental terms of agreement
The HOTS should not be produced in the same level of detail as the subsequent legal documents. They are the headings with brief detail, often in bullet point form.
- Allows the parties to identify any major unacceptable terms at an early stage
If there are major areas of dispute then further negotiations can be entered into however if these cannot be resolved the negotiations can be terminated without additional costs being incurred.
- Provides a drafting template and point of reference for the parties’ legal advisers
If successfully concluded, the HOTS are then passed to the respective legal advisers of the parties and are used as a drafting guide in the production and negotiation of the legal documents. If the HOTS are well drafted then the final version of the legal documents should reflect them!
Who prepares the HOTS?
The HOTS can be prepared by the parties themselves, but it is recommended that professional guidance is sought either from a surveyor or a solicitor in drawing up or at least reviewing any HOTS that have been produced, for guidance as to any matters that should be included or removed (as the case may be), and as to possible issues that may need to be considered.
In many cases there will be several ways in which a transaction can be structured. Ensuring that the most effective ways are considered and thought through from the outset can frequently save considerable time and money in the longer term.
Are HOTS legally binding?
HOTS are not intended to be legally binding on the parties as this would defeat the whole purpose of their production which is merely to provide a framework upon which detailed negotiations can then be progressed. It is, however, important to take great care when preparing HOTS as it is possible to create legally binding HOTS inadvertently. This is another reason for the recommendation that legal advice is taken before any HOTS are entered into.
Whilst HOTS are usually signed by (or on behalf of) the respective parties, one way of preventing them becoming legally binding is by ensuring that they are clearly stated as being “subject to contract” and subject to any other requirements that are specific to the parties, such as subject to approval of the Board of the relevant party.
This Fact Sheet is for information only and is not intended to be a substitute for legal advice.
For further guidance on the above and on all commercial property matters, please contact our Commercial Property Department on:
Tel: 033 3344 9600