Heads of Agreement: What is Their Purpose and Are They Binding?

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Updated December 19, 2022 Reviewed by Reviewed by Samantha Silberstein

Samantha (Sam) Silberstein, CFP®, CSLP®, EA, is an experienced financial consultant. She has a demonstrated history of working in both institutional and retail environments, from broker-dealers to RIAs. She is a current CFA level 3 candidate and also has her FINRA Series 7 and 63 licenses. Throughout her career, Samantha has used her expertise and various licenses and certifications to provide in-depth advice about household and business-specific financial planning, investing, credit cards, debt, student loans, taxes, retirement, and income strategies.

What Is a Heads of Agreement?

A "heads of" agreement is a non-binding document that outlines the basic terms of a tentative partnership agreement or transaction. Also known as a "heads of terms," or "letter of intent," a heads of agreement marks the first step on the path to a full legally binding agreement or contract and a guideline for the roles and responsibilities of the parties involved in a potential partnership before any binding documents are drawn up. Such a document is commonly used in commercial transactions, such as the purchase of a business.

As a business term, "heads of agreement" is most commonly used in Australia, New Zealand, and the United Kingdom.

Key Takeaways

A "head of" agreement is an initial, non-binding document that establishes the basic framework for a partnership or transaction.
The agreement is the first step toward creating a formal deal, and due to its tentative nature can often be renegotiated or reneged.
While heads of agreements are considered non-binding, certain aspects, such as nondisclosure clauses, may not be.

Understanding a Heads of Agreements

A heads of agreement document is only meant to serve as an introductory agreement to the basic terms of a transaction or partnership. It happens during the pre-contractual stage of negotiations. By design, a heads of agreement will not be comprehensive enough to cover all the necessary details involved in a binding formal agreement. But its lack of detail is also its strength; the parties are less likely to find something they do not agree on.

Once both parties come to a broad consensus on a partnership or transaction and have signed a heads of agreement document, the next step entails involving attorneys and accountants to iron out the details. Such details may include a number of pre-conditions that must be satisfied before a final agreement is made. The step after that is the signing of a binding contract, though a heads of agreement may be terminated at any time by either party with some caveats.

Heads of Agreement Purposes

A heads of agreement can provide both parties in a transaction or partnership the following:

Evidence for both parties that a deal is likely so neither party wastes time or money
Guidelines for negotiating a formal agreement
A running list of agreed-to terms
Proof to lenders or investors that both parties are committed to a formal agreement
A tool and guidelines for addressing confidentiality, due diligence, intellectual property, exclusivity, as well as other pre-contractual issues

Heads of Agreement: Binding or Not?

Heads of agreement can be binding or non-binding, depending on the language used, though they are not generally binding. That said, some aspects, such as intellectual property, exclusivity, confidentiality, and non-solicitation provisions, tend to be binding, though only if the time-frames are reasonable. If a heads of agreement document is written so that it is binding it can present problems.

Since most aspects of a heads of agreement are not binding, the remedies for non-compliance by either party are few. In fact, they only apply to the legally binding terms listed above. If there is a breach of those binding terms by one party, the other may file for an injunction, equitable relief, damages or specific performance.