A Heads of Agreement (HOA) falls somewhere between a written contract and a verbal handshake deal. It sets out the preliminary frameworks and key terms of an agreement, prior to being finalised in a formal contract. A HOA is classified as a preliminary agreement and can also be referred to as a Memorandum of Understanding, Terms sheet or Letter of Intent. 

Whether or not you have an enforceable contract depends on a number of points. However, it is important to be aware that a good commercial solicitor will not only disclose appropriate information regarding your HOA when necessary, but also keep a record of all disclosures that are made during negotiations to avoid any confusion or disputes at a later date. 

When should you use a Heads of Agreement? 

A HOA is primarily used in commercial partnerships to establish goals and expectations. However, this device can also be used for business owners who are involved in a family law separation but need to either sell a business or continue to operate the family business until a resolution is achieved that deals with the business. 

It is common in estate litigation and family law litigation that a HOA is drafted at mediation when parties reach an in-principle agreement  before formalising the agreement into a legally binding agreement such as Consent Orders, Financial Agreement or a Deed. 

Is a Heads of Agreement legally binding? 

For a HOA to be considered a legally binding contract a number of elements must be confirmed. 
Firstly, an agreement must be expressed in terms which are sufficiently certain in their operation to be enforceable in a court of law. 

Secondly, the document must be substantially complete and there must be an agreement on all essential terms – including agreement on the parties involved, agreement on subject matter and agreement on consideration and price. 

An agreement is void for uncertainty where it is too vague or unclear for its operations to be enforced in a court of law. An agreement can also be rendered void for incompleteness if the parties have failed to agree on any of the above-mentioned essential terms, or if the parties themselves have not reached an agreement on a term which they regard as necessary for the finalisation of the contract. 

If all the terms are agreed to at the time of the HOA, except for any uncertainties which are anticipated (such as the name of a purchaser to be finalised in a formal contract) the HOA will be binding.  

Legal Considerations 

It is important to be aware of legal terminology when drafting a HOA. Whereas phases such as ‘subject to contract’ and ‘subject to the preparation of a formal contract’ are used in relation to a proposed dealing with real estate, they will create a presumption that the agreement is not binding. Outside of conveyancing, no such presumptions exist. 

It is also important to be aware of the following considerations: 

• The importance and complexity of the transaction 
• The degree of formality or informality 
• The amount of detail settled by the agreement 
• The parties previous dealings with each other, as well as their conduct at the time 
• Whether the agreement is one of a series of interrelated agreements between the parties, and 
• Whether the preliminary agreement is clear and certain enough to be enforceable.  

To ensure that you have an enforceable preliminary agreement, it is important that your lawyer understand your wants, your business and your commercial objectives in order to accurately identify the terms that must be covered. Make sure that when choosing your lawyer, you select one that has a unique set of skills and understanding, as well as one that has strong communication and interviewing skills.