This Practice Note considers heads of terms (also known as a memorandum of understanding (MoU), letter of intent (LOI), comfort letter, pre-contract protocol, term sheet or heads of agreement) in the context of commercial deals. It considers what heads of terms are, how the courts determine whether heads of terms are legally binding, the commonly used phrase ‘subject to contract’, creating legally binding provisions, the duty to negotiate in good faith, and provisions typically included. It also considers which terms are usually intended to be legally binding and provides drafting advice on what to consider and include. This Practice Note also considers how to supersede the heads of terms in the final contract. For heads of terms for a commercial deal and drafting notes, see Precedent: Heads of terms—commercial contracts. We have produced a collection which is a comprehensive, interactive resource to managing contracts at each of their key lifecycle stages: negotiation, creation, review, variation and termination. It provides an overview of the key considerations and the processes for negotiating, reviewing, varying, assigning, novating or terminating those contracts. Each section or phase includes practical

The key hallmarks of a lease as opposed to a licence is whether the arrangement was intended to create legal relations between the parties and granted exclusion possession for a period at a rent, see: Hallmarks of a lease: Encyclopaedia of Forms and Precedents [5]. Here the issue is whether the limitation on hours of use indicates that exclusive possession has not been granted and hence it is not a tenancy. This will depend on all the terms of the agreement. There are cases where

This Agreement is made on [date] Parties 1 [Insert name of party] [of OR a company incorporated in [England and Wales] under number [insert registered number] whose registered office is at] [insert address] (Party A); and 2 [Insert name of party] [of OR a company incorporated in [England and Wales] under number [insert registered number] whose registered office is at] [insert address] (Party B), each of Party A and Party B being a party and together Party A and Party B are the parties. BACKGROUND (A) Party A carries on the business of [insert description]. (B) Party B carries on the business of [insert description]. (C) The parties wish to document certain non-legally binding Heads of Terms in connection with the Project, which they intend will form the basis of the Proposed Contract, and certain legally binding terms. The parties agree: 1 Definitions and interpretation 1.1 Definitions In this Agreement: [Associated Act • means the supply of goods or the provision of services in whole or in part that are the same as or similar to those required in connection with the performance of the Project;] Business Day • means a day [other than a Saturday, Sunday or public holiday] in

Date: [insert date] Subject to contract 1 Introduction 1.1 These heads of terms set out the principal terms and conditions upon, and subject to, which [insert name of first shareholder] (Party A) and [insert name of second shareholder] (Party B) are proposing to enter into a joint venture to [insert purpose of joint venture] (the Proposed Joint Venture). Each of Party A and Party B is a party and together they are the parties. 1.2 The terms in this document are not exhaustive and[, with the exception of paragraphs 7.2, 8, 9, 10, 11 and 12,] are subject to contract and not intended to be legally binding on the parties. Neither party to this document shall be legally bound to proceed with the Proposed Joint Venture unless and until a formal written joint venture agreement is entered into. 2 The joint venture Party A and Party B wish to enter into the Proposed Joint Venture to [insert purpose of joint venture and intended business and scope]. 3 Structure 3.1 The parties intend that the Proposed Joint Venture will take the form of a private limited company incorporated in England

[ On letterhead of the Investor ] Strictly private and confidential [insert Manager names] [insert contact address of Managers] (Managers) Date: [insert date] SUBJECT TO CONTRACT Dear Managers, Proposed investment in [insert name and registered number of company] (Company) 1 Introduction 1.1 Further to our recent discussions, this letter sets out the principal terms and conditions upon and subject to which we have agreed to make an investment with you in the Company (Proposed Investment). 1.2 The terms in this letter are not exhaustive and, with the exception of this paragraph 1.2 and paragraphs 14, 15, 16, 17 and 18, are subject to contract and not intended to be legally binding on the parties. No party to this letter shall be legally bound to proceed with the Proposed Investment unless and until a formal written [ share purchase agreement OR asset purchase agreement] is entered into. 1.3 Following the Proposed Investment, it is intended that the Company will acquire [the entire issued share capital OR the business] of [insert name of target] Limited ([MBO OR MBI] and together with the Proposed Investment referred to as the Proposal). 2 Funding Requirement and Arrangements 2.1 It is assumed that the Company’s funding requirement will be as follows:

In the preliminary stage of the private equity investment process, it is common for the parties to enter a heads of terms to set out the principal terms of the investment. See Precedents: Heads of terms—equity and Heads of terms—non-leveraged investment—equity. The document generally takes the form of a standard agreement, a letter or a term sheet. Nature and purpose The heads of terms sets out the principal commercial terms of the proposed investment. The document is not intended (with certain specific exceptions) to be legally binding on the parties to it. It is a statement only of the parties’ intentions and does not constitute: • a conditional contract • an unconditional offer capable of creating a binding contract by acceptance, or • any other form of promissory undertaking by either party to enter into the proposed transaction The general purposes of heads of terms are to: • express the parties’ intention to negotiate in good faith • set out the basis on which the proposed transaction will proceed, including such commercial terms (eg the investment details) and limitations

Heads of terms are used to briefly record the principal terms of a proposed transaction. This is a checklist for heads of terms (equity) to be used for a proposed management buyout (MBO). Parties Who are the parties? More specifically, identify: • the investor/s, and • the managers Preliminary matters What is the status of discussions between the parties to date? Is a confidentiality undertaking required from any one or more of the parties or their affiliates? Do the parties want to have a period of exclusive negotiation? Identify whether there could be any 'roadblocks' to the proposed investment (eg regulatory consents or licences, competition issues, consents to change of control) and how to deal with these. Conditions, regulatory and other approvals, etc What due diligence will be undertaken by the investor (eg legal, financial, accounting, taxation, technical and commercial)? Are any tax clearances, licences, regulatory approvals, third-party consents or registration formalities required before the investment may proceed? Are there any conditions (whether relating to the foregoing matters or not) needed, and

Heads of terms are used to briefly record the principal terms of a proposed transaction. This is a checklist for the heads of terms (equity) to be used for a proposed venture capital investment. Parties Who are the parties? More specifically, identify: • the investor/s • the founders, and • the investee company Preliminary matters What is the status of discussions between the parties to date? Is a confidentiality undertaking required from any one or more of the parties or their affiliates? Do the parties want to have a period of exclusive negotiation? Identify whether there could be any 'roadblocks' to the proposed investment (eg regulatory consents or licences, competition issues, consents to change of control) and how to deal with these. Conditions, regulatory and other approvals, etc What due diligence will be undertaken by the investor (eg legal, financial, accounting, taxation, technical, commercial)? Are any tax clearances, licences, regulatory approvals, third-party consents or registration formalities required before the investment may proceed? Are there any conditions (whether relating to the foregoing matters

This Practice Note contains a link here to the RICS Code for leasing business premises, 1st edition, RICS professional standard (Lease Code 2020) which contains pro-forma heads of terms (Appendix A) and a guide for landlords and tenants (Appendix B). Note

[ On letterhead of the Investor ] Strictly private and confidential [insert Company name] [insert Company address] Date: [insert date] SUBJECT TO CONTRACT Dear Directors, Proposed investment of Loan Notes in [insert name and registered number of company] (Company) 1 Introduction 1.1 Further to our recent discussions, this letter sets out the principal terms and conditions upon and subject to which we have agreed to make an investment of loan notes to be issued by the Company (Proposed Investment). 1.2 The terms in this letter are not exhaustive and, with the exception of this paragraph 1.2 and paragraphs 5, 6, 7, 8 and 9, are subject to contract and not intended to be legally binding on the parties. No party to this letter shall be legally bound to proceed with the Proposed Investment unless and until a formal written loan note instrument is entered into. 2 Loan notes 2.1 The Company will issue to the Investor and the Investor will subscribe for £[insert amount] of loan notes (Loan Notes). The Loan Notes [will not be secured

[ On letterhead of the Investor ] Strictly private and confidential [insert company name] [insert company address] [insert Founder names] [insert contact address of Founders] (Founders) Date: [insert date] SUBJECT TO CONTRACT Dear Directors and Founders, Proposed investment in [insert name and registered number of company] (Company) 1 Introduction 1.1 Further to our recent discussions, this letter sets out the principal terms and conditions upon and subject to which we have agreed to make an investment in the Company (Proposed Investment). 1.2 The terms in this letter are not exhaustive and, with the exception of this paragraph 1.2 and paragraphs 12, 13, 14, 15 and 16, are subject to contract and not intended to be legally binding on the parties. No party to this letter shall be legally bound to proceed with the Proposed Investment unless and until a formal written subscription and shareholders’ agreement is entered into. 2 Equity 2.1 The Investor will subscribe for the institutional equity as follows: Class of shares Number of shares Nominal Value per share Subscription Price (per share) Institutional loan notes (amount) [Preferred Shares] [insert amount] [insert amount] [insert amount] [insert amount] [The Investor reserves the right to invite other institutional investors to subscribe, at an appropriate time, for a proportion of the institutional loan

[ On letterhead of the Investor ] Strictly private and confidential [insert company name] [insert company address] [insert Founder names] [insert contact address of Founders] (Founders) Date: [insert date] SUBJECT TO CONTRACT Dear Directors and Founders, Proposed investment in [insert name and registered number of company] (Company) 1 Introduction 1.1 Further to our recent discussions, this letter sets out the principal terms and conditions upon and subject to which we have agreed to make a further investment in the Company (Proposed Investment). 1.2 The terms in this letter are not exhaustive and, with the exception of this paragraph 1.2 and paragraphs 8, 9, 10 and 11, are subject to contract and not intended to be legally binding on the parties. No party to this letter shall be legally bound to proceed with the Proposed Investment unless and until a formal written subscription [and shareholders’] agreement is entered into. 2 Equity 2.1 The Investor will subscribe for additional institutional equity as follows: Class of shares Number of shares Nominal Value per share Subscription Price (per share) Institutional loan notes (amount) [Preferred Shares] [insert