Heads of Agreement: Why It’s Not About the Label, But What’s Inside

Heads of Agreement: Why It’s Not About the Label, But What’s Inside

In commercial property transactions, documents like Heads of Agreement, Offer to Lease, or Agreement to Lease are often used to outline the key commercial terms before a formal contract is signed. These documents can be incredibly useful—but also potentially risky—if you don’t clearly understand how they operate.

Here’s the key takeaway:
It’s not the label that makes a document legally binding—it’s the content and the intention of the parties involved.

What is a Heads of Agreement (HOA)?

An HOA is a pre-contract document designed to capture the essential terms of a commercial deal. When drafted carefully, it can be a valuable tool to:

• Streamline negotiations
• Confirm agreement on key commercial terms
• Prevent backtracking on previously agreed matters
• Clarify each party’s roles and responsibilities in the transaction
• Create a roadmap for executing the final contract

However, if not handled properly, an HOA can accidentally become a binding contract—even if that wasn’t the intention.

When Is an HOA Legally Binding?

The enforceability of HOAs depends on the parties’ intentions and the language used in the document. The High Court case Masters v Cameron sets out three scenarios:

1. Binding immediately: All terms are agreed and parties intend to be bound, even if a formal contract follows.
2. Binding, but subject to conditions: The deal is agreed but performance depends on signing a formal agreement.
3. Not binding: No legal commitment until the formal contract is signed.

The problem? Many HOAs blur the lines, especially if the parties start performing some of the terms (e.g. taking possession of premises or sharing confidential information).

Tips for Getting It Right

If you want the HOA to be binding, then:

• Clearly say so in the document
• Specify which clauses are binding (e.g. confidentiality, exclusivity)
• Use clear, mandatory language
• Ensure the document includes essential contract elements like offer, acceptance, and consideration

If you don’t want it to be binding, then:

• Make it clear the HOA is non-binding or “subject to contract”
• Use softer, non-committal language
• Avoid starting work or performance too early
• Include a sunset clause so the HOA expires if the formal contract isn’t signed in time

Final Thoughts

Used thoughtfully, HOAs are a great way to lock in commercial alignment before diving into full contract drafting. But they should always be tailored to the transaction, with a clear understanding of what is and isn’t intended to be binding.

If you’re unsure whether your HOA protects your interests—or may be doing more than you think—now’s a great time to get legal advice before signing.