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Heads of Terms UK: Drafting Guide for Deals (2026)

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Written by Brad Askew Solicitor (non-practising)
Brad is on the roll of solicitors of England & Wales but does not hold a practising certificate and does not provide legal advice.
Updated June 2026 · England & Wales
When two businesses agree to do a deal, the journey from handshake to signed contract can take weeks or even months. Heads of Terms, sometimes called a term sheet, letter of intent, or memorandum of understanding, give that journey a sensible starting point. They capture what has been agreed in principle before lawyers start drafting the long-form contract, and they flag the points that still need to be worked out. For anyone involved in a UK acquisition, joint venture, investment round, property transaction or significant supply arrangement, getting the Heads of Terms right sets the tone for everything that follows. Done well, they save time and legal costs. Done poorly, they create arguments, delay completion, and occasionally become binding when nobody intended them to be. This guide walks through how Heads of Terms work in England and Wales, what they should cover, and the practical pitfalls to watch out for.

Overview

Heads of Terms are a short written summary of the main commercial points the parties have agreed so far on a proposed transaction. They typically sit between the initial conversations and the full suite of legal documents, acting as a reference point for everyone drafting and negotiating what comes next.

Most of the document is expressly stated to be non-binding, which means neither side is locked into the deal simply because they have signed. However, it is common for specific clauses to be carved out and made binding, usually the confidentiality provisions, any exclusivity period, which law governs the document, and who pays which costs.

Heads of Terms are used across a wide range of commercial contexts: share and asset acquisitions, mergers, shareholder investments, joint ventures, commercial leases, franchising arrangements, and large supply contracts. They do not replace proper due diligence or a detailed sale and purchase agreement.

Instead, they give the parties a shared framework so that the lawyers drafting the definitive contracts are not guessing at what was agreed in the boardroom.

Key steps

  1. Identify the parties and the deal structure. Set out exactly who is buying, selling, investing or partnering, using full legal names and company numbers where relevant. Describe the transaction in plain terms, for example a share purchase, an asset sale, a subscription for new shares, or a joint venture. Ambiguity here causes problems later, especially in group company situations.
  2. Agree the price and payment mechanics. State the headline consideration and how it will be paid, whether in cash at completion, in instalments, through deferred consideration, earn-outs linked to future performance, or share-for-share exchange. Mention any assumptions behind the price, such as a target working capital level, a cash-free debt-free basis, or a completion accounts adjustment.
  3. Set out conditions, exclusivity and timing. List the key conditions that must be satisfied before completion, such as due diligence, regulatory clearances, board approvals, or third-party consents. If one side wants a period of exclusive negotiation, agree its length and make that clause binding. Include an indicative timetable so momentum is not lost.
  4. Address confidentiality, costs and governing law. Decide whether the existence and terms of the deal must stay confidential, and for how long. Agree who pays their own legal and advisory fees, which is the usual position in the UK. Confirm that English law governs the Heads of Terms and that the courts of England and Wales have jurisdiction if a dispute arises.
  5. Make the binding and non-binding status crystal clear. This is the single most important drafting point. State expressly which clauses are intended to create legal relations and which are not. Without this wording, a court may look at the substance of what was agreed and hold the parties to terms they thought were merely aspirational.

Common questions

If you're dealing with this kind of situation, a call with an experienced legal adviser can help you work out the right next step — from £149.

Common questions

Q Are Heads of Terms legally binding in the UK?
In most cases, Heads of Terms are deliberately drafted to be non-binding on the main commercial points, so that either party can walk away before signing the full contract. However, certain clauses are usually made binding, including confidentiality, exclusivity, costs, and governing law. The key is to state clearly in the document which parts bind the parties and which do not, because courts will look at the substance rather than the label.
Q What is the difference between Heads of Terms and a letter of intent?
In practice, very little. Heads of Terms, letter of intent, memorandum of understanding, and term sheet are different names for broadly the same kind of document. Letters of intent are more common in construction and procurement, while term sheets tend to appear in investment deals. Whatever the label, the legal analysis is the same: what matters is whether the parties intended to create legal relations on any given clause.
Q Do I need Heads of Terms if the deal is small?
They are not legally required for any transaction, but even on smaller deals a one or two page summary can prevent misunderstandings. For straightforward purchases under a set-form contract, a short email confirming the key points may be enough. For anything involving staged payments, earn-outs, multiple parties or complex assets, taking time to agree Heads of Terms usually saves money during the main drafting phase.
Q Should I include an exclusivity or lock-out clause?
Exclusivity clauses, often called lock-out provisions, stop the seller from negotiating with other bidders for an agreed period. They are sensible if you are spending significant money on due diligence and want comfort that the target will not be sold underneath you. The period should be realistic, commonly four to eight weeks, and the clause must be drafted to be binding rather than swept up in the non-binding wording.
Q Can I change my mind after signing Heads of Terms?
Usually yes, provided the commercial terms were expressed as non-binding and you are not in breach of a binding clause like exclusivity or confidentiality. That said, pulling out late in a transaction can damage relationships and commercial reputation, and the other side may have spent money on due diligence and legal fees. Treat Heads of Terms as a serious commitment in spirit, even where they are not contractually enforceable.
Q Do Heads of Terms need to be signed by both parties?
Signature is not strictly required for a non-binding document, but it is good practice. Having both sides sign creates a clear record of what was agreed and when, which is useful if memories diverge later. Where clauses are intended to be binding, signatures help show the parties intended to create legal relations on those points. Electronic signatures are generally acceptable under English law.
Q What happens if the final contract differs from the Heads of Terms?
The definitive agreement almost always contains more detail than the Heads of Terms, and some commercial points will shift during drafting and due diligence. The final signed contract will normally contain an entire agreement clause stating that it supersedes all prior documents, including the Heads of Terms. This is deliberate: it stops either side arguing that earlier wording should override the carefully negotiated final contract.
If you're dealing with this kind of situation, a call with an experienced legal adviser can help you work out the right next step — from £149.

Sources

This guide is based on primary UK law and official guidance.

Brad Askew, Solicitor (non-practising)

Written & reviewed by

Brad Askew Solicitor (non-practising)

Brad is on the roll of solicitors of England & Wales but does not hold a practising certificate and does not provide legal advice. LegalDocuments.co.uk is not a law firm and does not provide regulated legal advice.

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Legal disclaimer
This article is for general information only. It is a tool to help you find your way — not legal advice, and not a substitute for speaking to a qualified adviser about your situation.