It is not uncommon for parties to a contract such as the sale and purchase of a business or a landlord and tenant of commercial premises to enter into Heads of Agreement prior to any contract being entered into.
If the Heads of Agreement are signed both parties, are the parties bound?
This has resulted in many disputes being submitted to the Courts for determination.
Normally Heads of Agreement are entered into as a gesture of good faith and a promise to proceed with the transaction. Usually Heads of Agreement are not meant to bind the parties to the terms of the agreement.
If you are entering into a Heads of Agreement you need to be explicit as to whether or not that document is intended to bind the parties. Normally Heads of Agreement will specifically state that the parties are not bound and will only be bound when contracts prepared by the respective parties’ solicitors have been approved and the parties sign them.
Heads of Agreement are usually symbolic of the mutual intention to proceed as usually the parties have not considered or documented the finer details of the agreement and are indicating their intention to proceed subject to accountancy and legal advice, whilst allowing them the opportunity to make necessary enquiries, conduct due diligence and allowing the solicitors from each party to negotiate and draft the precise terms and conditions of the substantive contract.
When parties enter Heads of Agreement it is usually a sign of commitment to enter into further legally prepared documentation at a later time. Whilst most of the time these agreements are not binding on the parties, they can be in certain circumstances.
If you are unsure as to the binding nature of Heads of Agreement you should obtain legal advice. At Everingham Solomons we have the expertise to assist you with all of your business and legal matters because Helping You is Our Business.
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