A heads of agreement is a pre-contractual document. It is generally interim in nature, as it is often used where the parties have reached consensus on the main characteristics of an agreement but do not necessarily intend to make a formally binding contract at that stage. This commonly arises where the parties have agreed on the basic points of an intended contractual relationship but have postponed both the negotiations of subsidiary matters and the execution of a formal document covering the whole agreement.

A heads of agreement is sometimes referred to as a term sheet, a memorandum of understanding or letter of intent. Typical uses of these documents include in the context of commercial leasing transactions and mergers and acquisitions transactions. Generally, these documents serve a similar purpose, but as one would expect, they may take different forms, for example, a heads of agreement would be structured like an agreement, whereas a letter of intent would be in letter form.

The legal issue which arises in these circumstances is whether the heads of agreement is binding, partially binding or not binding at all upon the parties. This will depend upon the intention of the parties to enter into contractual relations, which will be determined by having regard to the parties' words and conduct and the surrounding context. The use of clear and unequivocal statements in the document as to whether the parties are bound by its terms is advisable.

See General drafting issues.

This guidance note provides direction in relation to drafting a heads of agreement as well as an example precedent. See Heads of agreement.