Heads of agreement: what they are and when they become legally binding
Heads of agreement play a key role in starting business deals. They set out the main terms both sides agree on before a formal contract is made. This early document helps avoid confusion and keeps negotiations clear. Whether you are buying property, forming a partnership or setting up a joint venture, heads of agreement guide the process smoothly.
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A quick guide to heads of agreement
Heads of agreement set out the key terms in early negotiations. They help businesses agree on basics before a formal contract. While not always legally binding, they show the intention to be bound and reduce misunderstandings. Using clear language helps protect your business and keeps deals on track.
Simplifying early-stage business deals with confidence
A heads of agreement (HoA) is a simple written document. It sets out the key terms agreed by the parties during the early stages of a deal. While not always binding on the parties, it often shows a clear intention to be legally bound on certain terms. A heads of agreement ensures that both sides understand what they’ve already agreed before they move into a full contract.
You will often see a HoA in a commercial setting, especially when deals are complex or high-value. These include:
A HoA is often used as a preliminary agreement to outline the terms of a proposed agreement or proposed agreement between parties. It helps avoid pre-contractual issues such as delays, confusion or disputes over the terms and conditions.
But is a heads of agreement a legally binding document? Are all its clauses enforceable? What are binding and non-binding parts? What makes an agreement legally binding or not? And what if you need to terminate the deal later?
This article answers those questions in plain English. We explain what a HoA includes, when to use it, and how to avoid costly mistakes.
With Business Kitz, creating a properly drafted HoA is simple. Our platform helps you:
Whether you're a solo operator or part of a larger Pty Ltd, Business Kitz helps you protect your business from the start. Download all of your legal templates here.
Why use a heads of agreement before a formal contract?
A heads of agreement plays a vital role at the negotiation stage of a deal. It sets the direction early and helps both sides stay on the same page. This document is intended to be legally useful but is generally not legally binding as a whole. Still, it can include terms that are binding on the parties if the language used shows a clear intention of the parties to create obligations.
A HoA sets clear expectations
When you’re working on a commercial agreement, things can move quickly. If you don’t write down the main points, you risk misunderstandings or even disputes. A HoA solves this by summarising:
This kind of clarity helps avoid the lack of detail that can derail deals. It also provides evidence of each party’s intention to be legally bound, where applicable.
It signals trust and good faith
Entering a HoA shows serious intent. It tells the other side that you are not just exploring options but are ready to move towards a binding agreement. Some parts of a HoA may be intended to be binding, such as confidentiality, non-solicitation or a termination clause.
How does a HoA compare to other documents?
Here’s how a HoA stands against other early-stage documents:
Document TypePurposeBinding NatureHeads of AgreementOutlines agreed termsSometimes bindingMemorandum of Understanding (MoU)Explores cooperationTypically non-bindingFormal ContractFinalises obligationsLegally binding
Each document serves a different role. While a MoU is a non-binding document by design, a HoA can become legally binding if written the right way. A formal contract is always a legally binding document with full enforceability.
Using a HoA is common practice for complex or high-value deals. It helps clarify the terms of the agreement before you invest more time and money. When agreement is made too quickly without a HoA, there’s a higher risk of dispute.
When done right, a heads of agreement sets out the key facts and protects everyone involved.
What goes into a heads of agreement? Key clauses and structure
Are heads of agreement legally binding or just symbolic?
A heads of agreement may or may not be legally binding. It depends on how it’s written and what the parties intended. Some parts are meant to guide future negotiations. Others are meant to lock in key obligations from the start.
Which parts of a heads of agreement are usually binding?
A heads of agreement is often used during the early stages of a deal. The parties want to set out the key points they’ve already agreed. Some of those points may be binding, while others are not. The following clauses are commonly binding terms:
These terms are usually enforceable, especially if the agreement is clear. This is why the intention to be legally bound should be stated in writing.
Why wording and intent matter
The language used in a HoA helps courts decide whether a clause is binding. If it says the parties are intended to be legally binding, then it’s more likely to be enforced. If it reads like a guide only, then it may be treated as a non-binding document.
You should also consider the deal’s context. For example, in a purchase of a business or a commercial lease, a HoA with binding clauses can offer stronger protection.
The intention of the parties must be clear. If the agreement is made without that clarity, you risk confusion or disputes later.
How Business Kitz helps protect your business
With Business Kitz, your HoA templates are properly drafted by legal professionals. That means:
If you’re unsure whether the heads of agreement should be binding or not, always seek advice from your legal team. A HoA can shape the outcome of your final contract—make sure it says what you mean.
When should a business enter into a heads of agreement?
Knowing when to enter into a heads of agreement helps businesses avoid mistakes. A HoA suits certain situations better than a formal contract or a memorandum of understanding (MoU).
When a heads of agreement is appropriate
A HoA works well when the deal is complex, high-value or involves several phases. For example:
A heads of agreement allows parties to move forward with confidence. It sets out the key terms and shows an intention to be legally bound on some points. Meanwhile, final contract terms can be worked out later.
When to use a formal contract instead
Sometimes, a formal contract is better from the start. Use it when:
Jumping into a formal contract too early can cause delays if parties still disagree on crucial terms.
When a memorandum of understanding is better
An MoU suits early exploration where parties want to keep things loose. It generally acts as a non-binding document to show willingness without firm commitment.
Document use case guide
ScenarioBest document typeInitial negotiations with intentHeads of AgreementFinalised terms with no revisionsFormal ContractEarly exploration with no commitmentMemorandum of Understanding
Choosing the right document helps protect your business and keeps negotiations smooth. If unsure, seek legal advice to pick the best option for your situation.
Why you should get legal advice before signing your heads of agreement
Reviewing a heads of agreement with a lawyer is essential before signing. A poorly drafted document can cause real problems later. Even if a HoA seems simple, it can still affect your rights.
Using DIY templates or vague wording increases the risk that:
A lawyer helps you understand what you're committing to. They can flag risks and ensure the terms are clear and fair.
Checklist before signing a heads of agreement:
Ask your lawyer to review:
Business Kitz helps reduce legal risk by offering lawyer-reviewed HoA templates. These templates use clear language and are designed to balance binding and non-binding terms. This makes it easier to avoid enforceability issues and helps protect your business from the start.
If you need legal advice or to run your agreements by a lawyer you can get a free 30 mins legal consultation here.
How Business Kitz simplifies the entire heads of agreement process
Business Kitz makes managing heads of agreement easy and efficient. It covers every step, from creating to signing and storing your documents securely.
Generate with guided templates
Business Kitz offers clear, lawyer-reviewed templates. These guide users through the process step by step. You fill in the details without worry about missing crucial terms or making errors. The templates include key clauses, such as confidentiality and termination clauses, tailored for various commercial settings like property sales or partnerships.
Digitally sign via secure platform
Once your heads of agreement is ready, you can sign it digitally. Business Kitz’s secure signing tools ensure the process is fast and reliable. Everyone involved can sign from anywhere, saving time and avoiding delays. Digital signatures also provide evidence that the agreement is made and help protect your business.
Store and retrieve anytime
Business Kitz stores your documents securely in the cloud. You can access your heads of agreement whenever you need it. This secure storage means you avoid lost paperwork and have instant access for review or disputes. It keeps your commercial agreements organised and safe.
Tailored benefits for every user
Real-world use case: Sarah RealEstatePro
Sarah uses Business Kitz to create and manage heads of agreement for property deals. This streamlines her sales cycle by speeding up signatures and keeping documents secure. She avoids the typical delays of paperwork and gains more control over negotiations.
With Business Kitz, heads of agreement become a seamless part of your business workflow.
Frequently asked questions
What is the difference between a heads of agreement and a letter of intent?
A heads of agreement and a letter of intent are both used during early-stage negotiations. They set out the proposed terms of an agreement before a full contract is signed. A heads of agreement tends to be more structured and may include terms that are binding depending on how they’re written. A letter of intent is usually more general and often not binding.
Is a heads of agreement legally binding?
A heads of agreement is not always legally binding. Some parts can be, like confidentiality or exclusivity. Binding depends on the wording, the intent of the parties and how the document is used. If parties intend it to be binding and the language used is clear, courts may enforce it.
Does a heads of agreement protect intellectual property?
Yes, it can. If the agreement expressly includes clauses around intellectual property, it may help protect ideas or content shared during talks. Make sure the terms of the heads are clear and reviewed by a lawyer to avoid risks.
Can a heads of agreement include rights to use intellectual property?
Yes. Many agreements outline who can use or own intellectual property developed or discussed during talks. To be enforceable, these terms should be properly drafted and reflect the intention of the parties. This helps avoid disputes later.
What happens if someone breaches a heads of agreement?
If the agreement would be considered legally binding, a breach may lead to legal action. This could include a claim for loss or even a request for specific performance. If it’s not binding, options are limited. Always ensure terms are clear and that each party understands what is enforceable.
Are heads of agreement and heads of terms the same?
Yes. Heads of terms is another name for heads of agreement. Both set out the key terms of a deal before a full contract is made. They help parties agree on the structure and major points early.
When should I use a heads of agreement?
Use a heads of agreement when you want to record early deal terms but aren’t ready to finalise everything. It works well in complex deals, joint ventures or the sale of a business. It shows serious intent and outlines what’s already agreed. It’s often used before signing a binding contract.
Can a court enforce a heads of agreement?
A court can enforce a heads of agreement if the document is intended to be binding and includes clear language. If terms like non-solicitation or dispute resolution are expressly agreed, a court may order specific performance or other remedies. Clear wording helps show the intention of the parties.
Take control of your early agreements
Using heads of agreement documents helps you set clear terms and avoid misunderstandings early in negotiations. They give your business a solid foundation before signing a final contract. This reduces risk and speeds up decision-making.
Using a secure platform like Business Kitz makes creating, signing and storing these documents simple and safe. The guided templates and digital tools keep your agreements clear and protect your interests.
Speed up your deals without losing control. Start your next heads of agreement with Business Kitz today.
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