layout: page
title: Heads of Terms — English Law Drafting Reference
description: Drafting reference for English-law heads of terms — "subject to contract", RTS Flexible Systems v Muller, binding vs. non-binding provisions, exclusivity/lock-out, M&A and VC term sheets, SEIS/EIS.
permalink: /handbook/uk/contracts/heads-of-terms/
lastVerified: 2026-05-11
sources:
  - url: https://www.supremecourt.uk/cases/uksc-2009-0124.html
    title: RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH [2010] UKSC 14
    accessed: 2026-05-11
  - url: https://www.legislation.gov.uk/ukpga/2007/3/contents
    title: Income Tax Act 2007 — Parts 5 and 5A (EIS / SEIS)
    accessed: 2026-05-11
  - url: https://www.gov.uk/hmrc-internal-manuals/venture-capital-schemes-manual
    title: HMRC Venture Capital Schemes Manual
    accessed: 2026-05-11
confidence: high

Heads of terms — sometimes called a “letter of intent”, “memorandum of understanding”, “term sheet”, or “heads of agreement” — is a pre-contractual document setting out the commercial principles of a contemplated transaction. The principal function is to record what the parties have agreed in principle so that the formal definitive documentation can be negotiated against a stable baseline. The legal challenge is to ensure the document operates as a non-binding statement of commercial intent on most matters while binding on a few specific provisions (typically confidentiality, exclusivity, costs allocation, and dispute resolution). This page is the English-law drafting reference for the contract type. Cross-reference English contract law basics for the underlying formation principles, standard clauses for the boilerplate, and NDA for the confidentiality detail that typically accompanies heads of terms.

Function

Heads of terms perform several practical functions:

The danger is that, despite the parties’ intention to keep most provisions non-binding, the courts may find that the document is in substance a binding contract — particularly where the parties have begun to perform.

Binding vs. non-binding — RTS Flexible Systems v Müller

The leading authority on the binding/non-binding analysis is RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG [2010] UKSC 14 (Lord Clarke). The case concerned a letter of intent under which RTS was to design, manufacture, and install machinery for Müller; the letter said expressly that no contract would arise until execution of formal documentation. RTS performed under the letter and Müller paid; the formal contract was never signed. The Supreme Court held that the parties had reached agreement on essentials, that the “subject to contract” reservation had been displaced by conduct, and that a binding contract had been formed on the agreed terms.

The drafting consequence is direct: the words “subject to contract” or “not legally binding” are not magic — they are an indication of intention that can be displaced by subsequent conduct showing the parties intended to be bound. If the parties begin to perform before formal documentation is signed, a court may infer binding agreement on the terms agreed and to which both have committed.

A second relevant authority is Walford v Miles [1992] 2 AC 128 (HL) — Lord Ackner: a bare agreement to negotiate, or to negotiate in good faith, is unenforceable in English law for want of certainty. The position is different from many civil-law jurisdictions and from US law. The implication for heads of terms is that a clause obliging the parties to “negotiate in good faith to reach a definitive agreement” is, on this authority, of no legal effect — though it has reputational and process value.

A third authority is Compass Group UK and Ireland Ltd v Mid Essex Hospital Services NHS Trust [2013] EWCA Civ 200 (CA) — express good-faith obligations are enforceable on their terms, but their scope is construed by reference to the contract as a whole; they do not generally override express terms.

Express disclaimer and “Subject to Contract”

The drafting answer is an explicit disclaimer and the use of the “Subject to Contract” header on the document. Best practice:

Non-Binding Nature. Save for the provisions of clauses [X to Y] which the Parties intend to be legally binding, this document records the commercial principles of the proposed Transaction and is not intended to create legal relations between the Parties. No binding contract shall arise between the Parties unless and until they execute formal definitive documentation in respect of the Transaction.

The document should be marked “Subject to Contract” at the head of every page. Subsequent correspondence regarding the transaction should be similarly marked. Performance under the document should be avoided until formal documentation is signed.

Binding carve-outs

A small number of provisions typically are binding. They should be flagged explicitly. The common candidates:

Exclusivity / lock-out

An exclusivity (or “lock-out”) clause provides that for a defined period the seller / target / company will not negotiate with, solicit, or accept offers from any third party in respect of the contemplated transaction. The clause is binding (often the only commercially substantive binding clause).

The leading authority is Pitt v PHH Asset Management Ltd [1994] 1 WLR 327 (CA) (Sir Thomas Bingham MR) — confirmed that a lock-out agreement (i.e. a negative obligation not to negotiate with anyone else for a specified period) is enforceable in English law. By contrast, a positive obligation to negotiate with the counterparty is unenforceable under Walford v Miles.

The drafting elements of a robust exclusivity clause:

The break fee is conceptually distinct from a penalty: it is a liquidated payment on breach, subject to the Cavendish/ParkingEye legitimate-interest test (see standard-clauses liquidated damages).

M&A heads — structure and elements

In M&A practice, the heads of terms typically cover:

For private-company share sales, drag-along, tag-along, and ROFR principles in the existing shareholders’ agreement should be flagged and addressed where they affect deal feasibility (separate treatment in the shareholders’ agreement).

VC term sheets

In venture capital practice, the heads of terms are typically styled a “term sheet”. The structure is conventional:

SEIS and EIS — UK angel and seed investment

The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) sit at Income Tax Act 2007 Parts 5 and 5A. They provide income tax and capital gains tax reliefs to qualifying individual investors in qualifying small UK companies. The reliefs are economically substantial — typically 30–50 % of the investment recoverable through income tax relief and CGT exemption on disposal — and most early-stage UK term sheets are structured to preserve SEIS/EIS qualification.

Key qualification requirements (broadly):

The “no preferential rights” requirement is the most awkward for VC term sheets — investors typically want preference shares with a liquidation preference. The structural answer is a separate EIS-eligible ordinary share for SEIS/EIS investors (often a separate class with limited preference) combined with conventional preference shares for non-relief investors.

HMRC advance assurance is the pre-clearance process. The company submits the proposed investment terms to HMRC’s Small Company Enterprise Centre; HMRC confirms whether the proposed terms would qualify. Advance assurance is not binding on HMRC but reflects HMRC’s view of the submitted facts; investors typically require advance assurance as a condition of investment.

Governing law and jurisdiction

For heads of terms, the governing-law clause is binding (it governs any dispute about the binding provisions, including exclusivity and confidentiality). The English-law election is conventional for UK transactions and is uniformly enforced. See standard-clauses governing law.

Jurisdiction: exclusive English-court jurisdiction is normal; the Hague 2005 Convention applies to exclusive jurisdiction clauses between signatory states (UK, EU, etc.).

Sample heads-of-terms structure

  1. Header — “Subject to Contract”; date; parties.
  2. Recitals — describe the contemplated transaction.
  3. Commercial principles (non-binding) — price, structure, consideration, key terms.
  4. Conditions to definitive agreement — diligence; regulatory clearances; shareholder approvals.
  5. Timetable — target signing/completion dates.
  6. Confidentiality (binding) — or cross-reference to separate NDA.
  7. Exclusivity (binding) — duration; scope; carve-outs; break fee.
  8. Costs (binding) — each party bears own.
  9. Term and termination (binding) — effective period of the heads.
  10. Non-binding status (binding declaratory) — the RTS Flexible Systems disclaimer.
  11. Governing law and jurisdiction (binding).
  12. Signature — by each party’s authorised signatory.

Bibliography

Statutes (legislation.gov.uk)

Case law (bailii.org / supremecourt.uk)

HMRC guidance

Cross-references

Disclaimer: This content is informational, not legal advice. Last verified: 2026-05-11. Always consult a solicitor admitted to practise in England and Wales for binding decisions.