What Is a Heads of Agreement (And When Is It Legally Binding)?

Intro

You’ve negotiated the key terms of a deal and want something in writing before final contracts are drawn up. That’s where a Heads of Agreement comes in—but be careful. Sometimes, what feels like a “non-binding outline” can turn out to be legally enforceable.

This post explains what a Heads of Agreement is, when it’s used, and how to avoid accidentally locking yourself in too early.

Why It Matters

Many business owners, agents, and developers use Heads of Agreement to record deal terms before formal contracts are prepared. But if the document isn’t worded properly, it can create binding legal obligations—even when that’s not the intention.

A poorly drafted Heads of Agreement can lead to disputes, derail negotiations, or force you to proceed with a deal before you’re ready.

What You Need to Know

What Is a Heads of Agreement?

A Heads of Agreement is a document that sets out the key commercial terms of a proposed deal—like price, timing, and responsibilities—before full legal contracts are prepared.

It’s often used in:

• Business sales or purchases

• Lease negotiations

• Joint ventures or partnerships

• Commercial property transactions

It’s meant to give both parties confidence that they’ve “agreed in principle”—but that doesn’t always mean it’s non-binding.

Is It Legally Binding?

It depends on how it’s written. Courts look at factors like:

• The language used (“binding” vs “subject to contract”)

• Whether all essential terms are agreed

• Whether the parties intended to be bound

• How the parties acted after signing

If the document reads like a complete deal—and the parties behave like it’s final—it may be legally enforceable, even if you planned to negotiate further.

| Risk: If you want a Heads of Agreement to be non-binding, it needs to say so clearly. Ambiguous language can lead to costly disputes.

| Note: In the case of retail leases in NSW, even if a Heads of Agreement appears binding, the lease won’t be enforceable until the tenant has received a Lessor’s Disclosure Statement in the proper form. This is a mandatory step under the Retail Leases Act 1994 (NSW).

What Should It Include?

A well-drafted Heads of Agreement should:

• Outline key terms (e.g. parties, price, timing, scope, conditions)

• State whether it’s binding or non-binding

• Be clear about what is (and isn’t) finalised

• Set out next steps—like preparing a full contract

You can also make some parts binding (e.g. confidentiality, exclusivity, costs) and others non-binding—if that reflects what you’ve agreed.

Commercial Insight

Heads of Agreement are useful tools for keeping momentum in a deal—but only when used properly. They can give comfort to both parties, clarify expectations, and reduce miscommunication. But they should never be rushed or treated as “just paperwork.”

If the deal’s not final, your documents need to make that clear—before the other side starts treating it like a done deal.

What to Do Next

• Don’t sign anything until you’ve clarified whether you want it to be binding

• Use clear language—especially about whether a final contract is still required

• Get legal input before sending or signing anything that sets out deal terms

• If you’re already in a dispute over a Heads of Agreement, get advice early

What’s written down matters—even in a “draft” document.

Closing Wrap

I help business owners, landlords and agents prepare Heads of Agreement that reflect the real deal—without locking them in too soon. If you’re documenting key terms and want to avoid future disputes, I can help make sure you get it right from the start.

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