Legal update
Buying and selling care homes: Heads of Terms
Tom Lumsden, a partner at CooperBurnett LLP, looks at Heads of Terms and exclusivity agreements and what they mean when it comes to buying and selling care homes
It is important when buying or selling business assets, such as a care home, to consider whether clear Heads of Terms are needed and, if so, what they should say. In almost all cases, the answer should be ‘yes’.
What are Heads of Terms?
Heads of Terms for any particular deal will set out the basic (but important) key terms of the proposed deal. They are crucial for most deals, because they make express the basic assumptions being made by the parties, for example the price, the timetable and, importantly, the parties’ obligations leading up to the formal point where contracts are exchanged (which is the point when the parties become legally bound). Heads of Terms, properly drafted,
allow the parties’ advisers to manage the disposal of a business in an efficient and timely manner. However, it is essential to get the balance right. The Heads of Terms should not be so complicated or detailed that they resemble the actual sale contact. The main sale contract documentation (such as an asset purchase agreement or a share purchase agreement) should be the contractual documentation that deals with the minutiae or ‘small print’ of the terms of the deal and the parties’ obligations. On the other hand, Heads of Terms, which are too ‘bare’ will not contain enough detail for the parties and, in particular, their professional advisers to rely on. This will be a source of frustration, because much time and cost will be wasted at the beginning of drafting an asset purchase agreement or share purchase agreement by the parties’ lawyers and accountants in trying to work out what the ‘core’ terms of the deal should be.
September 2024
www.thecarehomeenvironment.com
A set of well-drafted Heads of Terms should be considered similar to building solid foundations for a house. Once those foundations have been properly established, the parties’ advisers can then efficiently carry on with ‘building’ the rest of contractual documentation. Poorly drafted Heads of Terms can result in the parties’ lawyers having to completely ‘unpick’ the provisions in the main contractual documents and, possibly, having to start from scratch where there has been a material misunderstanding.
Legally binding? The parties should also decide at an early
Heads of Terms will set out the basic (but important) key terms of the proposed deal
stage whether or not the Heads of Terms are to be legally binding or non-legally binding. This will depend on the intention of the parties. In the UK, most Heads of Terms would proceed on the basis that they are ‘subject to contract’. This shows that the parties clearly intend that the agreed terms are not to be legally binding until some further condition has been fulfilled. Each party can walk away at any point should they wish to do so. The meaning of the words ‘subject to contract’ is well established in English law: neither party can be bound until a formal contract is entered into. There can be situations where even a
‘subject to contract’ arrangement can be found to be legally binding. This would be very unusual, however, but might include a case where the parties had signed ‘subject to contract’ Heads of Terms but had never signed a formal sale contract, and both parties have gone on to perform the contract
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