As a real estate lawyer and music fan I sometimes find myself turning to lyrics for inspiration. For example, nothing can explain the problem of not getting heads of terms right quite as snappily as the following lyrics in Basement Jaxx’s 2001 hit, Where’s your head at: “you may find yourself trapped in the incomprehensible maze, where's your head at, you don't make it easy on yourself ….”

If you don’t want to be trapped in an incomprehensible maze during your property transaction and you want to make it easy on yourself, it’s far better to think about where your heads are at before you get stuck in.

When and why should heads of terms be used in property transactions?

Heads of terms should be agreed and written down when buying/selling/granting/ taking a lease of a property. The process of negotiating heads of terms forces parties to a transaction to focus on what the deal is and what the obligations on the parties should be. Heads of terms are also vital to thrash out key issues, deal breakers, misconceptions or the need for further specialist advice early on. Written heads of terms can also assist you and your property lawyers throughout the transaction itself to check that the legal documentation accurately reflects the deal being done and the intentions and needs of the parties.

Should final heads of terms be agreed without input from lawyers?

Before final heads of terms are agreed you should always run the draft heads of terms past your real estate and construction lawyers. This is to ensure that your legal interests are adequately protected, the structure of the proposed transaction works, and that everything that should be has been covered. Often there are fundamental points that should be agreed at the heads of terms stage, such as break clauses, alterations, alienation, repairing obligations, construction aspects, for example defects protection provisions and availability of warranties, but we frequently see these points missed off or glossed over in heads of terms.

What are the common traps that we see with heads of terms?

  • Not having them - parties may misinterpret the deal and their obligations at the outset
  • Standard form used - terms may not always be relevant to the specific transaction
  • Too vague - solicitors may end up negotiating commercial terms

What problems can be avoided by having good head of terms?

Having a good set of heads of terms can reduce the legal costs of drafting the legal documentation and help to streamline the timescale of a transaction. This is because the deal does not need to be held up at a later date whilst the parties’ advisors get instructions. Commercial relations between parties can be soured if issues that could have been addressed at the outset aren’t picked up until later. Frequently we deal with urgent and high value transactions that can sometimes be held up with costs escalating because the important points that should have been included in heads of terms to a transaction have been overlooked.

Think about where your heads are at before you get stuck in and let your lawyers check draft heads of terms before they are agreed so that the problems outlined above can be avoided.