What Are Heads of Terms (HOTS)?
Heads of Terms (HoTs), also often known as letters of intent or heads of agreement, are effectively the blueprint for a deal. They outline the key terms that parties agree on during negotiations, setting the groundwork for the real deal to come. While they show serious intent, their legal impact is usually more akin to a handshake agreement than a legally binding contract.
When Are They Used?
Think of HoTs as the starting line for a race. They’re drawn up once the basics of a deal are agreed but before everyone dives into the nitty-gritty and starts incurring more significant costs. If negotiations drag on, you may well see a few versions before everything is set in stone.
Why Are They Important?
Well drafted HoTs should act as a roadmap for the lawyers. They help streamline negotiations when it comes to drafting up the real deal. Having clear and comprehensive HoTs means fewer surprises and smoother sailing when a deal gains traction.
Enforceability of HOTS
Typically, HoTs are expressed to be non-binding with the exception of the provisions relating to confidentiality and any exclusivity provisions. The commercial terms outlined in the HoTs (e.g. the mechanics of the transaction, price, timescales etc.) are usually non-binding, but it is still important to ensure that they are drafted carefully for the reasons set out above.
Conclusion
Getting the HoTs right is crucial for getting your deal started on the right foot and keeping it on track. Professional input whether from lawyers, accountants, corporate finance specialists or all three is imperative for streamlining the process and mitigating any potential pitfalls.
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