A heads of agreement (HOA) is a short document that records the key terms two parties have agreed on – the price or rent, the term, the main conditions – before the formal lease or contract of sale is drawn up. In a commercial property deal it captures the shape of the agreement in principle, so both sides know they are aligned before the lawyers start drafting.
Most explainers on heads of agreement are written by law firms and stop at the general contract-law definition. This one looks at how a HOA actually works in a commercial lease or sale, what each side wants from it, and the question everyone asks – whether it is legally binding.
What is a heads of agreement?
A heads of agreement is a plain-English summary of a deal the parties have agreed in principle. You’ll also see it called a HOA, a terms sheet, a letter of intent or a memorandum of understanding (MOU) – the labels differ, but the job is the same: set out the essentials of the deal before the full legal document is prepared.
Its purpose is practical. Getting both sides to agree the core terms up front means the lawyers draft from a clear brief rather than negotiating every point through the contract, which saves time and legal cost and reduces the chance of the deal unravelling later over something that could have been settled at the start.
What’s in a commercial property heads of agreement?
A commercial HOA covers the terms that define the deal, without the full detail of the eventual lease or contract. It typically sets out:- The parties – landlord and tenant, or vendor and purchaser
- The property being leased or sold
- The agreed rent or purchase price, and any review structure
- The lease term and options, or the settlement terms for a sale
- Any deposit or holding amount
- Key conditions – finance, due diligence, board or director approval
- Exclusivity and confidentiality between the parties
- The timeline to a formal lease or contract
- A statement that it is “subject to contract”
Is a heads of agreement legally binding?
This is the question that matters most, and the honest answer is that it depends on how the document is written. As a general position, the commercial terms in a HOA are usually intended to be non-binding – an agreement in principle, “subject to contract” – while specific clauses such as confidentiality, exclusivity and who bears costs are often drafted deliberately to bind the parties. So a heads of agreement can be partly binding and partly not, by design. Two things drive whether a term binds: the wording, and the parties’ intention. Language like “subject to contract” signals that the commercial terms are not yet a binding deal, but wording alone is not a guarantee, and a document can bind you in ways you didn’t intend if it is drafted loosely. This is genuinely a legal question that turns on the specific document and circumstances, so treat the above as general information only and have a solicitor review any heads of agreement before you sign it – both so you’re not accidentally committed, and so the protections you do want are actually enforceable.Heads of agreement vs a lease or contract of sale
People often ask what the difference is between a heads of agreement and the lease or contract itself. The HOA is the agreement in principle – a summary of what the parties intend. The lease or contract of sale is the binding, detailed legal document that follows, and it’s what actually governs the deal once signed. Put simply, a heads of agreement is the step before the lease or contract, not a replacement for it. It guides the drafting of the formal document, but the rights and obligations that hold up in practice live in the lease or contract, which is why that document still needs to be prepared and reviewed properly.Where a heads of agreement fits in a commercial deal
In a typical commercial transaction, the heads of agreement sits early in the timeline: the parties negotiate the key terms, record them in a HOA, then move through due diligence and into the formal lease or contract, and finally to settlement or lease commencement. Using one well pays off. A HOA locks in the shape of the deal while goodwill is high, surfaces any deal-breakers before both sides spend money on lawyers, and gives those lawyers a clear brief to work from. At Ray White Commercial Western Sydney, negotiating and documenting heads of agreement is part of how we get leasing and sale deals to the point where the lawyers can take over with confidence.What each side should watch for
A heads of agreement protects you only if it reflects what you actually want, so each side should read it with their own interests in mind.- A landlord or vendor generally wants exclusivity for the negotiation period, a committed deposit where appropriate, clearly stated conditions, and a real timeline that keeps the deal moving.
- A tenant or buyer wants the escape routes that matter – the deal being subject to finance, due diligence or board approval – and wants to be sure they’re not accidentally bound to proceed, while capturing any incentives that were agreed. Getting these into the HOA is far easier than arguing them into the lease or contract later.
The bottom line on heads of agreement
A heads of agreement gets everyone aligned on the deal in principle before the lawyers draft the binding document. Used well, it saves time, reduces legal cost and stops a deal falling over later on something that should have been settled at the start – provided it is written carefully and reviewed by a solicitor. If you’re negotiating a commercial lease or sale in Western Sydney, talk to the RWC Western Sydney team about getting the terms right from the heads of agreement onward.
Frequently Asked Questions About HOA
Is a heads of agreement legally binding?
It depends on how it is written. As a general position, the commercial terms are usually non-binding and “subject to contract”, while clauses like confidentiality and exclusivity are often drafted to bind. Because this turns on the specific wording, have a solicitor review any HOA before you sign.
Can you back out of a heads of agreement?
Usually you can walk away from the commercial terms while they remain non-binding and subject to contract, though any binding clauses – such as confidentiality or exclusivity – still apply. The safest course is to confirm your position with a lawyer, since it depends on how the document is drafted.
What’s the difference between a lease and an agreement?
A heads of agreement records what the parties intend in principle; a lease is the binding, detailed legal document that governs the tenancy once signed. The heads of agreement comes first and guides the drafting, but the lease is what carries the enforceable rights and obligations.
Do you need a lawyer for a heads of agreement?
It is strongly advisable. A heads of agreement can bind you in ways you did not intend, or leave out protections you needed, so having a solicitor review it before you sign is worth the small cost relative to the deal at stake.