Introduction
Receiving an offer on your commercial property is a key milestone in the selling process. Evaluating buyer credibility, negotiating terms carefully and confirming financial capability are essential steps before agreeing a sale. Working closely with your commercial agent and solicitor will help ensure a smooth transition from offer to legal documentation and ultimately to completion.
What Are Heads of Terms (HOTS)?
Any proposed commercial property transaction normally begins with a document that sets out the key points agreed between the buyer and seller. This document is known as the Heads of Terms (HoTs), sometimes referred to as a Memorandum of Sale or Agreement in Principle.
Heads of Terms are not usually legally binding (unless specific clauses state otherwise), but they form the commercial foundation of the deal and provide a clear instruction for solicitors to prepare the formal contract documentation.
Once both parties agree the Heads of Terms, the legal process can begin.
Why Heads of Terms Are Important
Although not legally compulsory, preparing clear Heads of Terms offers several advantages:
- Establishes the main commercial agreement early
- Reduces the risk of misunderstandings later
- Helps solicitors work efficiently
- Minimises negotiation delays
- Provides clarity on responsibilities and timelines
- Improves the likelihood of completing the transaction
A well-prepared Heads of Terms document can significantly shorten the overall sales process.
Who prepares the Heads of Terms?
Heads of Terms are usually drafted by:
- The selling agent
- The buyer’s agent
- A commercial surveyor
- Occasionally solicitors (in more complex transactions)
Both parties review the draft and agree any amendments before proceeding.
Key information included in Heads of Terms
A commercial property Heads of Terms document will typically include:
Parties to the Transaction
- Full legal names of buyer and seller
- Company details if applicable
Property Details
- Address and description of the property
- Title information if relevant
Nature of the Transaction
- Freehold sale
- Leasehold sale
- Investment sale subject to tenancy
- Sale with vacant possession
Purchase Price and Payment Terms
- Agreed price
- Deposit amount
- Payment structure
- VAT position if applicable
Timetable
- Target exchange date
- Proposed completion date
- Key milestones
Conditions
- Survey requirements
- Planning or finance conditions
- Due diligence period
Costs
- Responsibility for legal fees
- Agent fees
- Searches and disbursements
Special Conditions
- Fixtures and fittings included
- Access rights
- Lease assignments
- Overages or clawback provisions (if relevant)
Binding vs Non-Binding Clauses
Most Heads of Terms documents are expressed as “subject to contract”, meaning they are not legally binding.
However, certain elements may be binding, including:
- Confidentiality agreements
- Exclusivity or lockout agreements
- Cost-sharing arrangements
Professional legal advice should always be obtained if binding provisions are included.
Heads of Terms in international transactions
When dealing with overseas buyers or companies, Heads of Terms become even more important.
Language differences, legal systems and commercial expectations can create misunderstandings if terms are not clearly documented.
Best practice includes:
- Using precise wording
- Providing translations where necessary
- Engaging professional advisers familiar with cross-border transactions
In some cases, using a legal translator can prevent costly disputes later.
Common causes of disputes without proper Heads of Terms
Transactions are more likely to fail where there is:
- Ambiguity over price or conditions
- Misunderstood completion dates
- Unclear property boundaries
- Incorrect assumptions about VAT
- Missing information about tenancies
- Disagreement over inclusions
Clear Heads of Terms significantly reduce these risks.
Professional Advice
though Heads of Terms can appear straightforward, commercial property transactions often involve complex legal and financial considerations.
It is strongly recommended that you seek advice from:
- A commercial property solicitor
- Chartered surveyor
- Commercial agent
Professional guidance ensures the document reflects your interests and avoids potential disputes.
Summary
Heads of Terms provide the commercial blueprint for selling a property. While not usually legally binding, they are a critical step that clarifies expectations, sets timelines and allows the legal process to begin efficiently. Investing time in preparing accurate Heads of Terms can help prevent delays and improve the chances of a successful completion.