In short
Heads of agreement (also called a term sheet or memorandum of understanding) records the commercial terms parties have agreed before a full sale agreement or investment document is drafted. Most of it is deliberately non-binding, but a handful of clauses — confidentiality, exclusivity, costs, and governing law — need to bind immediately or they're worthless. Getting that split wrong is the most common way heads of agreement cause disputes rather than prevent them.
What should be binding, and why the default assumption is dangerous
Parties often assume a document headed 'heads of agreement' is automatically non-binding because it says so on its face. That's not reliable — Australian courts look at substance over labelling, and a document with sufficiently certain and complete terms can be found binding even where headed as preliminary, particularly if the parties have started acting as though a deal is done. We draft heads of agreement with an express clause stating which provisions are intended to have immediate binding effect and which are not, rather than relying on a single boilerplate line, because ambiguity here is exactly where courts have found unintended binding obligations in the past.
The provisions that should almost always bind immediately are confidentiality, exclusivity (if agreed), cost allocation, governing law and dispute resolution, and any standstill on public announcements. Commercial terms like price, structure and completion conditions are usually left non-binding and subject to a formal sale agreement, but even then we record them with enough precision that they form a genuine reference point in later negotiation rather than something either side can walk away from without consequence.
Exclusivity and cost undertakings
An exclusivity (or 'no shop') clause stops the seller from soliciting or negotiating with other buyers for a fixed period while due diligence and drafting proceed. We fix a genuine end date rather than an open-ended term, and specify what happens if that date passes without completion — automatic lapse, or a right for either party to extend by agreement. A break fee or cost reimbursement clause, if the parties want one, needs care: an unreasonably punitive break fee risks being characterised as an unenforceable penalty, so we tie it to actual costs incurred (due diligence, legal fees) rather than a speculative lost-opportunity figure.
Cost undertakings — who pays their own legal and advisory costs regardless of outcome, and whether either party can recover costs if the other walks away without reasonable cause — are worth spelling out even at term sheet stage, since disputes about wasted transaction costs are common when a deal falls over after weeks of due diligence.
Deal structure and conditions precedent
The term sheet should record the proposed structure at a level of detail sufficient to guide drafting — share sale versus asset sale, headline price and any adjustment mechanism, and the major conditions precedent (finance approval, landlord consent, regulatory approval, key employee retention). We flag structural choices here rather than leaving them to the sale agreement stage, because the choice between a share sale and an asset sale affects stamp duty treatment, employee transfer mechanics and warranty scope in ways that are far cheaper to settle before due diligence starts than after.
Timetable and process
We include an indicative timetable — due diligence period, exclusivity end date, target signing and completion dates — understanding it as a planning tool rather than a binding obligation, but a realistic one. Term sheets that set unrealistic timetables tend to create pressure to cut corners on due diligence or warranty negotiation later, which is where avoidable disputes get baked in.
Confidentiality and permitted disclosure
The confidentiality clause needs to survive termination of the heads of agreement itself, and should specify who within each party's organisation can see confidential information, whether external advisers are covered, and what happens to information and documents if the deal doesn't proceed — return, destruction, or retention with continuing confidentiality obligations. We also address permitted disclosure to financiers, insurers or regulators, since an absolute confidentiality clause can inadvertently block a party from getting finance approval within the agreed timetable.
What the fixed fee covers
- Drafting of the heads of agreement or term sheet from your commercial terms
- Express binding/non-binding split across every clause, not just a general statement
- Exclusivity period and cost allocation drafted to be enforceable
- Structuring input on share sale versus asset sale before due diligence begins
- Confidentiality clause covering advisers, financiers and post-termination obligations
Mistakes we see
- Assuming the 'non-binding' heading protects every clause in the document
- No fixed end date for exclusivity, leaving a seller locked out of the market indefinitely
- Break fees set high enough to risk being an unenforceable penalty
- No agreed structure (share versus asset sale) before due diligence starts
- Confidentiality obligations that don't survive if the deal falls through
Who this is for
- Buyers and sellers negotiating a business or company sale before due diligence
- Parties entering a joint venture or strategic partnership discussion
- Investors and founders agreeing investment terms ahead of a term sheet-to-shareholders-agreement process
- Anyone asked to sign a 'non-binding' document who wants to know what actually binds them
Frequently asked questions
- Is a heads of agreement legally binding in Australia?
- It depends on the drafting and the parties' conduct, not the heading. Courts look at whether the terms are sufficiently certain and complete and whether the parties intended to be bound. We draft an express clause stating which provisions bind immediately (confidentiality, exclusivity, costs) and which don't, to avoid that being left to a court to decide later.
- What happens if we sign heads of agreement and then decide not to proceed?
- If the commercial terms are properly drafted as non-binding, either party can generally walk away without breaching the agreement, but the binding clauses — confidentiality, exclusivity while it runs, and any cost allocation — still apply. That's exactly why those clauses need to be identified clearly at drafting stage.
- Do we need a break fee in our term sheet?
- Not always. Break fees are more common in larger transactions or where one party is investing significant due diligence cost upfront. If included, it needs to reflect a genuine pre-estimate of loss or actual costs, not a punitive figure, or it risks being unenforceable as a penalty.
- Should we decide share sale versus asset sale at term sheet stage?
- Ideally yes, at least in principle. The choice affects stamp duty, employee transfer, warranty scope and completion mechanics significantly, and settling it early avoids redrafting the whole document later once due diligence has started.
- How long does a heads of agreement take to draft?
- Usually 3–5 business days once the commercial terms are settled between the parties, faster if we're working from a term sheet the other side has already proposed.
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