Legal update
as if the formal contract had been signed i.e. there had been mutual reliance. In this situation, there might be a clear intention on the part of the buyer and seller that the Heads of Terms should be treated as being legally binding.
Sometimes, the parties will want some
provisions of the Heads of Terms to be legally binding, while others should not be legally binding. It is usually essential that, in order for Heads of Terms to legally binding, there must be some form of ‘consideration’. This usually means a payment made by one party to the other. The consideration can be as little as a nominal sum of £1. Alternatively, the parties could exchange the Heads of Terms as a formal deed, in which case no consideration is needed. The English courts do not like being
asked to enforce documents where there is lack of certainty. Because Heads of Terms are, by their nature, the skeletal structure on which the detail of a sale or purchase agreement will take shape, Heads of Terms can sometimes be too uncertain to enforce. Contractual documents nowadays
very often contain a requirement on the parties to ‘negotiate in good faith’. A duty of good faith does not automatically exist and is therefore not ordinarily implied into contractual documents in England and Wales. However, such clauses are becoming more common.
Confidentiality clauses
Confidentiality clauses should normally be included in all Heads of Terms. They are essential. The parties will need to exchange commercially sensitive information, to allow both sides to make sense of the assets being bought and sold, and to allow the parties to carry on further negotiations where the due diligence reveals matters that are material.
Sometimes, after this initial exchange of information, one of the parties decides to withdraw. If, by this point, neither party is obliged to keep the information that been exchanged secret, this could be potentially damaging for those involved. Confidentiality clauses can be contained either in the Heads of Terms document or in a separate stand-alone confidentiality agreement
Exclusivity clauses Another important provision to consider is whether an exclusivity clause is needed. As with confidentiality clauses, these can either be contained within the Heads of
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Exclusivity clauses allow the parties a ‘clear run’ at negotiating the sale terms
Terms and expressed to be legally binding, or they can be set out in a separate legally binding contractual document. Exclusivity clauses allow the parties, most often the buyer, a ‘clear run’ at negotiating the sale terms with the seller. They will often contain a prohibition against the seller from talking to other potential buyers during the exclusivity period. If one or other of the parties breaches the terms of the exclusivity agreement during this exclusivity period, then there can be sanctions, including payment of fixed sums and/or an obligation on the party having breached the agreement to pay the abortive costs of the other party. This is important because, during the initial stages of due diligence, before formal contracts are signed, very significant professional costs can be incurred.
There are some hidden traps with
exclusivity agreements. It can be very easy for the parties to spend too much time trying to settle the finer details of the exclusivity agreement. An exclusivity agreement should do little more than provide a ‘safe space’ for the parties to negotiate the key terms of the deal, for a limited period only. Exclusivity agreements should not be used to try to capture every single detailed aspect of the deal; nor should they be used as a way to create an option contract or conditional contract. The danger is that the buyer and seller could spend weeks negotiating the terms of an exclusivity agreement, because one of the parties is very anxious and wishes to shackle the other party to the detailed provisions in the exclusivity agreement. This is not the function of an exclusivity agreement, and to ignore this principle usually ends up with both parties becoming frustrated by delays. Sometimes the legal costs of trying to agree too much detail in the exclusivity agreement can result in the parties incurring solicitors’ costs that are totally out of all proportion to the nature of the deal involved.
Costs
Finally, a word about costs. Heads of Terms are normally subject to contract (and each party can therefore walk away should they wish to do so), so that each party would
Disclaimer The above article is not intended as legal advice and must not be relied upon as such.
pay its own costs. However, there may be situations where it would be perfectly reasonable to ask the other party to agree that the Heads of Terms should contain a legally binding obligation so that if that party withdraws, then it should pay the abortive professional costs of the other side. The initial due diligence costs (even at a pre-contract stage) can be very significant especially in a sale of a high value asset. The parties should always instruct their solicitors and accountants and other advisors at the very outset of trying to negotiate terms for a sale. So often, the buyer and seller will spend weeks talking directly to each other and will put together the Heads of Terms themselves. These draft Heads of Terms are then brought to the parties’ legal advisors, who might have to advise their clients that for legal or tax or other reasons, the whole deal has to be restructured. It is usually safer to avoid unnecessary time and cost being wasted by asking lawyers and accountants to help with preparing the Heads of Terms at the earliest possible opportunity.
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Tom Lumsden
Tom Lumsden is a partner at CooperBurnett LLP in Tunbridge Wells, specialising in commercial property. He has particular expertise in the sale and purchase of care homes, including acquiring land for care home developments.
www.thecarehomeenvironment.com September 2024
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