A ‘heads up’ on heads of terms
Heads of terms, or HOTs, are commonly produced at the outset of property transactions. They often set out the parties’ agreement in principle on key commercial points with a view to simplifying the negotiation of the transaction documents. HOTs are intended to carry moral force and can assist in identifying the intention of the parties. Properly drafted HOTs are not intended to be legally binding. However, the recent case of Abberley v Abberley  EWHC 1564 (Ch) has provided a warning to parties that inadequately drafted HOTs are capable of being legally binding.
How can HOTs be a binding agreement?
HOTs are capable of forming a binding agreement if they relate to a disposition of an interest in land, by:
- satisfying the requirements for the creation of a contract – offer, acceptance, consideration and the intention to create legal relations; and
- satisfying the requirements under section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. This requires the contract to be in writing, incorporate all of the terms expressly agreed by the parties within one document and be signed on behalf of each party.
How to avoid HOTs becoming a binding agreement?
One common approach is to include the phrase “subject to contract” as a heading on the HOTs. This creates the rebuttable presumption that the entirety of the document is not binding unless and until there is a signed agreement. Including “subject to contract” within the document can create issues of interpretation as to whether it relates to the entire document or only specific provisions. In any event, a rebuttable presumption created by including “subject to contract” is not fool proof. The presumption can be rebutted if the conduct of the parties suggests that they are complying with the obligations and thereby intended to waive the condition.
An express provision should be included within the body of the HOTs to clarify that they are to have no legally binding effect on the parties.
- Include “subject to contract” on the heading of any HOTs.
- Include an express provision that the HOTs have no legally binding effect on the parties.
- Ensure that the parties wait until exchange/completion before they begin to comply with any obligations or conditions, other than any that clearly relate to the period before exchange, such as an obligation on a buyer to obtain a survey by a certain date.
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