Heads Of Terms Example (UK): Key Clauses, What To Include And Pitfalls

If you’re negotiating a big commercial deal, it’s tempting to jump straight into “the contract”.

But in practice, most well-run businesses start with a short document that sets the direction for the deal before anyone spends serious time (and money) on drafting: the heads of terms.

This guide breaks down what heads of terms are, when you should use them, what a heads of terms example (UK) usually includes, which clauses matter most, and the common pitfalls that can trip up small businesses.

What Are Heads Of Terms (And Why Do They Matter For Small Businesses)?

Heads of terms (sometimes called “HoTs”, “term sheet” or “heads of agreement”) are a written summary of the key commercial points the parties have broadly agreed in principle.

They’re used in many types of transactions, including:

• business sales (asset sale or share sale)
• commercial leases
• fundraising or investment
• joint ventures and partnerships
• major supply or distribution deals
• service contracts with larger customers

For small businesses, heads of terms are useful because they can:

• save time (you don’t negotiate the same points twice)
• save legal fees (your lawyer drafts from an agreed framework)
• reduce misunderstandings (everyone gets the same “deal picture”)
• keep momentum when negotiations are moving quickly

They’re also a great way to force the “awkward” issues (price, timelines, exclusivity, liability, termination) to the surface early - before you commit resources to a deal that isn’t actually workable for your business.

Are Heads Of Terms Legally Binding In The UK?

This is the part many business owners don’t realise: heads of terms can be legally binding (in whole or in part), depending on how they’re written and what the parties do.

In the UK, whether heads of terms are binding generally comes down to normal contract principles: did the parties intend to create legal relations, are the terms sufficiently certain, and is there offer/acceptance/consideration?

Many heads of terms documents are intended to be:

• non-binding overall (the “main deal” isn’t final until formal contracts are signed), but
• binding for certain clauses (like confidentiality, exclusivity, costs, governing law)

The risk is when the document is vague about what is and isn’t binding, or when the wording makes it look like you’ve already agreed a final deal. Also, labels aren’t decisive: even if you write “subject to contract”, your conduct (for example, starting performance or publicly confirming the deal is done) can still increase legal risk.

Practical Tip: Be Clear About “Subject To Contract”

If your intention is that the heads of terms are not the final contract, you normally include wording like “subject to contract”. That signals that the parties don’t intend to be legally bound until a full agreement is executed.

But don’t treat “subject to contract” as a magic spell. If you include binding obligations (like exclusivity) or behave as though you have a final agreement, you can still create legal risk.

When You Might Want Binding Clauses

Even when the “main deal” is non-binding, it’s common (and often sensible) to make certain protections binding from day one, like confidentiality (especially if you’re sharing customer lists, financial information, or pricing models).

That said, it’s worth sanity-checking the scope of those clauses. For example, a “quick” confidentiality clause that is too broad may prevent you from speaking to funders, insurers, or professional advisers.

A Heads Of Terms Example (UK): What You Should Include

There isn’t one universal format that works for every deal, but a strong heads of terms example usually follows a clear structure.

Below is a practical “what to include” checklist you can adapt (with legal advice) to your situation.

1) Parties And Background

Start with the basics:

• legal names of each party (including company number if relevant)
• registered address
• key contact person(s)
• a short description of the deal (one paragraph is usually enough)

This sounds obvious, but it helps prevent issues like signing with the wrong legal entity (e.g. a trading name rather than the limited company).

2) Deal Structure

This is where you explain what the transaction actually is. For example:

• asset sale vs share sale (for a business acquisition)
• exclusive reseller vs non-exclusive distributor (for distribution)
• fixed term vs rolling contract (for ongoing services)

If the deal is a joint venture, it can help to state early whether you’re forming a new company or operating through a contract arrangement. In some cases, it’s also worth thinking ahead about whether a Shareholders Agreement will be required.

3) Scope: What’s Included (And What Isn’t)

Scope is where deals often go wrong, because each party quietly assumes something different.

Good heads of terms should clarify:

• the products/services included
• deliverables and milestones
• any exclusions (e.g. “marketing not included” or “support limited to email only”)
• territory (UK only? specific regions?)
• channels (online only? retail only? both?)

If the deal involves software or a tech platform, it’s also smart to flag early whether you’re licensing IP, assigning IP, or granting limited usage rights. That often drives what your final contract needs to say.

4) Price, Payment Terms And Adjustments

In a heads of terms example, pricing is usually more than “£X”. Consider including:

• total price and currency
• deposit amount (if any) and when it’s due
• payment schedule (milestone-based, monthly, completion date etc.)
• VAT treatment (where relevant)
• late payment interest (if you plan to apply it)
• any price review mechanism (especially for longer-term deals)

If you’re providing ongoing services, it’s also worth thinking about what happens if costs rise. A clear price review or notification mechanism can prevent disputes later.

Note: VAT and interest can have tax and statutory implications depending on the transaction, so it’s worth taking accounting or tax advice on your specific situation.

5) Timeline And Key Conditions

Most commercial disputes aren’t about “bad faith” - they’re about mismatched expectations on time.

Include dates for:

• target signing date for the final agreement
• start date and end date (or renewal approach)
• delivery or completion date
• any conditions that must be satisfied first (e.g. due diligence, finance approval, landlord consent)

If the deal depends on due diligence, say so explicitly, and clarify what “due diligence” covers (financial, legal, operational, regulatory) and what happens if issues are found.

6) Responsibilities And Resourcing

This is an underrated section in heads of terms.

Spell out who is responsible for what, for example:

• who provides content, data, or specifications
• who is responsible for onboarding and training
• who supplies materials or equipment
• whether subcontracting is allowed (and on what conditions)

If you’ll be relying on third parties (like couriers, installers, or freelance contractors), it’s sensible to flag that early so the other party’s expectations are realistic.

7) Key Risk Clauses (Even If High-Level)

Heads of terms don’t need to include full legal drafting, but it’s wise to agree the “direction of travel” on risk allocation.

This might include:

• liability caps (overall, and for specific categories)
• exclusions (e.g. indirect or consequential loss)
• insurance requirements
• indemnities (if any)

If you’re not sure what’s market-standard for your industry, this is a good time to ask, because it’s easier to negotiate these items now than after a 40-page contract lands in everyone’s inbox.

For context, it can help to review typical limitation of liability clauses so you understand what you’re agreeing to in principle.

8) Confidentiality And Information Handling

Confidentiality often appears in a heads of terms example in one of two ways:

• a short binding clause within the heads of terms; or
• a separate NDA signed before detailed discussions begin

If you’re exchanging commercially sensitive information, it may be cleaner to use a standalone Non-Disclosure Agreement, especially if the main deal is still evolving.

If personal data is involved (e.g. customer lists with names/emails, employee data in a business sale), you also need to think about UK GDPR and the Data Protection Act 2018 - and whether a separate data processing agreement or data sharing terms are required.

9) Exclusivity (If Any)

Exclusivity is common in acquisitions, investment rounds, and some distribution deals. It usually means one party agrees not to negotiate with anyone else for a period.

If you’re granting exclusivity, make sure the heads of terms clearly cover:

• the duration of exclusivity
• what is prohibited (e.g. negotiating, signing, even “discussing”?)
• any carve-outs (existing discussions, specific parties, internal group companies)
• consequences for breach (termination, reimbursement of costs, etc.)

Exclusivity is a classic “binding clause” even where everything else is subject to contract - so it needs careful drafting.

10) Termination And What Happens If The Deal Doesn’t Proceed

This is where heads of terms protect you from the “slow fade” scenario: negotiations drag on, resources get used, but nobody commits.

Consider including:

• when either party can walk away (and how)
• what happens to confidential information on exit
• who owns work product created during negotiations (if applicable)
• whether either party pays the other’s costs (usually: each party pays their own)

If you later need to formally end negotiations, a clear paper trail helps document that the discussions have ended (and what happens to information and any work done to date).

11) Status Of The Document (Binding Vs Non-Binding)

A well-drafted heads of terms example will include a “status” section that sets out:

• which clauses (if any) are legally binding
• that the remainder is subject to contract
• that the final agreement is conditional on execution of formal documents

This is the part that stops a helpful negotiation document from turning into an accidental contract.

12) Governing Law And Jurisdiction

For UK-focused deals, it’s common to state that the heads of terms (and later the main agreement) will be governed by the laws of England and Wales, and disputes will be heard in the courts of England and Wales.

If you’re dealing with a party overseas, don’t gloss over this. Governing law and jurisdiction can have a real impact on cost, enforceability, and practical risk.

Key Clauses To Pay Extra Attention To (Even At Heads Of Terms Stage)

Not every heads of terms needs to be long, but there are a few clauses that regularly cause problems for small businesses because they’re either missing or misunderstood.

Liability Caps And Insurance

If the other side wants a very high liability cap (or “uncapped liability” for broad categories), that can be a major red flag.

At heads of terms stage, you don’t need perfect drafting, but you should be clear on:

• your “max exposure” if something goes wrong
• whether your current insurance would respond
• whether the other side is expecting you to take on risks you can’t realistically manage

Payment Triggers And Cash Flow Protection

Small businesses often feel the pain of cash flow first.

In your heads of terms, define payment triggers clearly (e.g. “50% on signing, 50% on delivery”) so you’re not stuck in a situation where you’ve delivered most of the work but can’t invoice yet.

IP Ownership (Especially For Creative, Marketing, And Tech Deals)

If you’re creating content, designs, software, training materials, or any other IP, you should clarify who owns what.

Even a simple statement like “Supplier retains ownership of pre-existing IP; Customer owns the final deliverables upon full payment” can save weeks of negotiation later.

Confidentiality And Announcements

Some deals require discretion, especially if you’re negotiating with a major customer or planning an acquisition.

Consider whether either party can announce the deal publicly, and if yes, whether announcements need prior written approval.

Relationship Status: Contractor, Partner, Or Something Else?

This is more important than it sounds.

Heads of terms should avoid language that accidentally suggests a partnership or agency relationship unless that is genuinely intended. If you are building a collaboration that may look like a joint venture, getting the structure right early helps avoid the “we thought we were partners” dispute later.

If you’re hiring individuals rather than partnering with another business, make sure your actual engagement paperwork is correct (for example an Employment Contract versus an independent contractor agreement).

Common Heads Of Terms Pitfalls (And How To Avoid Them)

Heads of terms are meant to make life easier. But if they’re vague, inconsistent, or rushed, they can create the exact problems they’re supposed to prevent.

Pitfall 1: Treating Heads Of Terms Like A Casual Email

Even if your heads of terms are only 2–3 pages, they can still have legal effect.

Avoid informal wording like “we will” and “agreed” if you don’t intend to be legally bound. Use clearer language such as “the parties propose” or “the parties intend”, and include “subject to contract” where appropriate.

Pitfall 2: Leaving Out The “Deal Breaker” Issues

Many businesses focus on price and timeline, but forget to agree the real deal breakers early, such as:

• who owns IP
• service levels and remedies
• liability caps
• termination rights
• exclusivity

If you leave these out, you can spend weeks negotiating the contract only to discover the deal was never viable for one party.

Pitfall 3: Unclear Scope (Leading To Scope Creep)

Scope creep is one of the fastest ways to lose profit on a project.

Make sure your heads of terms includes enough detail on what’s included, what’s excluded, and how variations will be handled (including pricing for additional work).

Pitfall 4: Accidentally Agreeing A Binding Deal

If your heads of terms contains all essential terms and looks final, you might unintentionally create a binding contract.

To reduce this risk:

• include a clear “status” clause
• mark the document “subject to contract”
• state which clauses are binding and which aren’t
• avoid starting performance before the full contract is signed (unless your lawyer confirms it’s safe)

Pitfall 5: Not Aligning Heads Of Terms With The Final Contract

Sometimes the heads of terms are negotiated by commercial teams, and the final contract is negotiated by legal teams, and the two don’t match.

When the final contract arrives, check it against the heads of terms line-by-line. If there’s a mismatch, raise it early.

What Happens After Heads Of Terms Are Agreed?

Once your heads of terms are signed off, the next steps usually look like this:

1. Due diligence (if relevant): one or both parties review financial/legal/operational details.
2. Drafting the formal agreements: lawyers prepare the long-form contract(s) that reflect the heads of terms.
3. Negotiation and mark-ups: parties resolve the “fine print” issues and any gaps from the heads of terms.
4. Signing and completion: the formal agreements are executed and the deal completes.

If your deal is a business acquisition, it’s also common to have a checklist of actions and documents required at completion. For transactions like that, a properly drafted sale agreement (and supporting docs) is critical, because it will cover warranties, disclosures, restraint issues, employee matters, and handover obligations.

Key Takeaways

• Heads of terms are a practical way to agree the key commercial points of a deal before committing to full contract drafting.
• A heads of terms example (UK) usually includes the parties, deal structure, scope, price and payment terms, timelines, responsibilities, and a clear statement of what is (and isn’t) legally binding.
• Even if the main terms are “subject to contract”, certain clauses like confidentiality or exclusivity can be binding - and your conduct during negotiations can also affect risk - so wording and process both matter.
• Common pitfalls include unclear scope, missing deal-breaker issues, mismatched expectations on timing, and accidentally creating a binding agreement.
• Getting heads of terms right early can save you time, legal costs, and disputes later - and helps your lawyer produce a final contract that matches the deal you actually want.

If you’d like help preparing or reviewing heads of terms for your next deal, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.