By James Lainas and David Krolikowski
What is a Heads of Agreement (HOA)?
An HOA is a written document that records two (or more) parties’ intentions to enter into a more comprehensive agreement in the future. It sets out the main commercial terms and other arrangements that the parties agree to include in the agreement, providing guidance for future negotiations.
HOAs are particularly useful for complex transactions.
Elements of an HOA
Some of the key matters that an HOA might deal with include timeframes, payment terms, pre-contractual issues (such as exclusivity, confidentiality and due diligence) and any key commercial requirements for your business.
An HOA is usually non-binding. The HOA should specify if it is to be binding.
Benefits of a good HOA
Benefits include the following:
- A clear HOA makes it easier for parties to negotiate and finalise an agreement, ultimately saving the parties time, cost and effort.
- If your HOA reflects the commercial intentions of you and the other party, it will reduce the likelihood of future disputes arising over terms.
- It can also be used to resist any undisclosed requirements being included in the final agreement.
- The process of preparing an HOA will also quickly bring to the attention of the parties any disputes in relation to key issues, and can avoid extended fruitless negotiations arising out of irreconcilable commercial expectations.
Risks associated with an absent or poorly drafted HOA
The absence of an HOA can lead to significant differences in expectations when binding documents are prepared. By that time, it is often the case that the parties are financially and psychologically invested in a particular outcome.
If you do not include crucial terms in your HOA, then it will be difficult to insist later that these terms be included in the final agreement. Further, if those crucial terms aren’t clear, then it is more likely your intentions won’t be reflected in the agreement. If you seek to introduce new, possibly contentious terms in the agreement, the other party may threaten to simply walk away.
Be sure to get legal advice before finalising an HOA – terms that you consider innocuous may have hidden implications which would have been made evident if you had sought legal advice. A poorly worded HOA may even be binding in circumstances where you intended it not to be – just calling it an HOA is not sufficient to ensure it is not binding.
You are a tenant negotiating a lease for new premises. After an HOA has been finalised, the landlord submits their standard lease which contains unusually landlord-friendly provisions, including a demolition clause giving the landlord the power to terminate the lease during the term in order to redevelop the building containing your premises.
If notice of such a provision has not been specified in the HOA, then there is a strong argument the landlord cannot include it in the lease.
What to do next
Insist upon an HOA where practicable. Get us involved in the negotiation, preparation and review of your HOA, to ensure that it accurately records your commercial intentions, and facilitates the efficient negotiation of the final agreement. If you invest time and effort at the HOA stage, with advisers familiar with similar transactions, this will aid in identifying key gaps in negotiations and ensure both the HOA and final agreement accurately reflect what you want.