Heads of Agreement vs Binding Contracts in Property

Heads of agreement, letters of intent, memorandums of understanding and term sheets all do the same job: they record the principal commercial terms of a commercial property deal before anyone drafts the formal contract. Whether any of them actually binds you turns on how it is drafted, what the parties intended, and the jurisdiction. Get that wrong and you can end up committed to terms you thought were still preliminary.

A pre-contract document that records every material term can bind you the moment you sign it, whatever the heading says.

The Principal Pre-Contract Documents

Heads of agreement (HoA)

The most formal of the four. It records the principal commercial terms: price, settlement date, GST treatment, conditions and any special inclusions. A well-drafted HoA usually spells out which terms bind and which are subject to formal contract.

Letter of intent (LoI)

A letter from one party to the other recording an intention to proceed on stated terms. Less formal than an HoA, and better suited to a deal that is still taking shape or an initial expression of interest.

Memorandum of understanding (MoU)

Close cousin of the LoI, and more common outside property. In property it tends to show up in joint ventures or development partnerships rather than straight acquisitions.

Term sheet

A short summary of the key deal terms. You see it more in development and syndicate transactions than in direct acquisitions.

1 When Pre-Contract Documents Bind

In Australia the test comes down to what the parties intended, following the High Court in Masters v Cameron. That case set out three main categories.

Category 1: bound immediately, formal contract to follow

Everything is agreed and the parties intend to be bound straight away. The formal contract is a documentation exercise, not a fresh negotiation. The HoA is enforceable in its own right.

Category 2: bound to perform, subject to formal contract

The terms are agreed, but performance waits on a formal contract. If a party then refuses to sign on the agreed terms, the other can seek specific performance.

Category 3: not bound until formal contract

The HoA records where negotiations reached and nothing more. Either party can walk away until the formal contract is signed.

Courts sometimes recognise a fourth category: the parties are bound to negotiate in good faith, but not bound on the substantive terms.

2 What Drives the Categorisation

Four things push a document one way or the other. Express words carry the most weight: if the HoA says "subject to formal contract", or "non-binding except for clauses X and Y", a court will respect that. Completeness matters too, because an HoA covering every material term leans towards Category 1 or 2, while one that leaves substantial terms open leans towards Category 3. So does conduct. If the parties act as though bound, with deposits paid, possession given or work commenced, that colours how a court reads their intention. Common practice in the relevant industry then shapes the inference.

3 Why Use a Pre-Contract Document

Recording commercial alignment

The parties have agreed the principal terms and want them on paper so neither side backs out. This earns its keep on drawn-out transactions where the formal contract will take weeks to draft.

Bridging conditional periods

The buyer needs to run due diligence before committing to a formal contract, and the vendor wants some assurance the buyer is serious. An HoA holds the deal together through DD.

Avoiding "stalking horse" sales

An HoA that stops the vendor selling elsewhere while DD runs keeps the property out of reach of a competing bidder.

Lender or board approval

The buyer needs sign-off from a lender or board before signing the formal contract. The HoA records the deal while those approvals come through.

4 What Should Be Binding

Most well-drafted HoAs make a handful of provisions binding and leave the substantive transaction non-binding.

Exclusivity (lock-out)

The vendor agrees not to sell to anyone else during a defined exclusivity period. Binding from signing.

Confidentiality

Anything shared during DD stays confidential. Binding from signing.

Costs

Each party carries its own costs until the formal contract. Binding from signing.

Substantive deal terms

Usually framed as non-binding intentions, subject to formal contract.

5 Buyer-Side Approach

Define binding vs non-binding clearly

State plainly which clauses bind and which are subject to formal contract. Do not leave the Masters v Cameron categorisation to inference.

Solicitor review before signing

Pre-contract documents carry legal effect. Have your solicitor read the HoA before you sign it.

Avoid completing all material terms

A complete HoA can land in Category 1, immediately binding, even when it is labelled "subject to formal contract". Leave some substantive matters for the formal contract and you keep the non-binding intention intact.

Limit exclusivity period

Match the vendor lock-out to your realistic DD timeline. An overly long exclusivity is unfair to the vendor and rarely does anything for you.

Track conduct after signing

Conduct can override stated intentions once the parties start behaving as though bound. Steer clear of any act that implies more commitment than the HoA is meant to carry.

6 Common Pitfalls

Treating HoA as informal

Signing it as "just a handshake on paper", without legal review. An HoA can carry real legal effect.

Failing to specify binding clauses

An HoA that is silent on which clauses bind is an invitation to a later dispute. Spell it out.

Implying agreement on missing terms

If the HoA leaves "settlement details to be agreed" but the parties press on as though settled, a court may treat those implied terms as binding.

Misalignment with formal contract

The formal contract can end up with terms that contradict the HoA. Where the HoA aimed at a specific outcome, the formal contract should deliver it.

Frequently Asked Questions

Should I sign an HoA before DD?

On substantial transactions, usually yes, to lock in exclusivity while DD runs. Just make sure the document draws a clean line between the binding lock-out provisions and the non-binding substantive terms.

Can I withdraw from an HoA?

It depends on the categorisation. A Category 3 HoA lets you walk; Category 1 or 2 may not. Get solicitor advice before you withdraw.

Is verbal agreement binding?

Property transactions generally need a written contract under state legislation, so a verbal agreement on the substantive property terms is usually unenforceable. Even so, reliance and conduct can still create binding obligations in some circumstances.

What if the vendor breaks exclusivity?

If the lock-out provision is binding and the vendor sells elsewhere, you can seek damages, and in narrow cases potentially specific performance. What the damages come to depends on your loss.