Pre-Exchange Agreements UK: Heads of Terms Guide

What this document is

A pre-exchange agreement is a general label for the documents parties put in place between initial commercial agreement and the legal exchange of contracts. The most common form is a heads of terms document, sometimes called a memorandum of understanding, letter of intent, or 'subject to contract' letter.

These set out the headline commercial terms: price or rent, property description, key dates, conditions, and any special arrangements such as rent-free periods or overage. Other pre-exchange documents include exclusivity or lock-out agreements, which restrict the seller from negotiating with other parties for a defined window, and confidentiality agreements covering sensitive information exchanged during due diligence.

Most heads of terms are drafted to be non-binding as to the main deal, meaning either side can walk away before exchange, but certain clauses such as confidentiality, exclusivity and costs are usually made expressly binding. Getting the binding and non-binding elements right is where careful drafting matters most.

How to use this document

1. Agree the commercial terms in principle. Before any paperwork is drafted, both sides need a clear view of the core deal: purchase price or rent, property being transferred or let, length of term, break options, deposit, completion date and any conditions such as planning consent or vacant possession. Agents often circulate a first draft based on their discussions with the parties.
2. Mark the document 'subject to contract'. This wording is critical in English law. Labelling heads of terms and related correspondence 'subject to contract' signals that the parties do not intend to be legally bound by the commercial terms until formal contracts are signed and exchanged. Without it, you risk an earlier exchange of emails being treated as a binding agreement.
3. Separate binding from non-binding clauses. Most heads of terms are non-binding on the deal itself but contain binding provisions on confidentiality, exclusivity, costs, and sometimes a duty to negotiate in good faith. The document should make this split explicit so there is no argument later about which obligations actually bite.
4. Consider a lock-out or exclusivity agreement. If you are the buyer investing in surveys, searches and legal fees, you may want the seller to agree not to negotiate with anyone else for a set period, often four to eight weeks. Exclusivity agreements are binding contracts in their own right and need clear drafting on duration, scope and remedies for breach.
5. Use the pre-exchange period for due diligence. With the framework agreed, lawyers raise enquiries, order searches, review the title, and check leases, planning consents and environmental reports. Buyers arrange finance and surveys. If issues emerge, the heads of terms are revisited. Once both sides are satisfied, contracts are prepared for formal exchange and the deal becomes binding.

Common questions