Heads of Agreement in Australia: What They Are and When to Use Them

When you’re close to a deal but not quite ready to sign the full contract, a Heads of Agreement (sometimes called a “Head of Agreement” or “HOA”) can be a practical way to lock in the key commercial terms and keep momentum.

Small businesses use HOAs when negotiating everything from supplier arrangements and joint ventures to buying a business or partnering with a distributor. They’re quick to prepare, help align expectations, and give everyone confidence to proceed with due diligence and final contract drafting.

But here’s the catch: not all Heads of Agreement documents are created equal. They can be binding, non‑binding, or a mix of both. If the wording is off, you could unintentionally commit to more than you think-or end up with a document that doesn’t protect you at all.

In this guide, we’ll explain what a Heads of Agreement is, when to use one, how to make it enforceable (or deliberately non‑binding), and which clauses to include so it does its job without creating legal headaches later.

What Is A Heads Of Agreement?

A Heads of Agreement is a short-form document that sets out the essential terms the parties have agreed in principle, while they work towards a final, comprehensive contract. Think of it as a roadmap for the deal.

Businesses often use an HOA to capture the commercial “headlines” early-price, scope, key milestones, responsibilities-so both sides can invest time and money in due diligence and drafting with confidence.

In Australia, a Heads of Agreement can be:

• Non‑binding overall, but with certain clauses (like confidentiality or exclusivity) deliberately binding.
• Fully binding as a complete contract (less common, but possible if the language and level of detail support that intent).

The most important point is clarity. Your document should clearly state whether the parties intend to be bound now, later, or only for specific clauses.

Are Heads Of Agreement Legally Binding In Australia?

They can be-if that’s what you intend and the document supports it.

Courts look at the wording, the level of detail, and the parties’ conduct to decide whether an HOA is binding. If your document reads like a complete contract with no material terms left to negotiate, a court might treat it as binding even if you call it “non‑binding.”

To avoid surprises, make your intent explicit. If you want an HOA that’s mostly non‑binding, include a clear clause stating that the parties do not intend to create legal relations until a formal contract is executed, and then carve out any specific clauses that are binding (for example, confidentiality, exclusivity, costs, and governing law, plus an obligation to negotiate in good faith if that’s important to you).

If you plan to make the HOA binding (for instance, where time is critical and you want something enforceable while the long‑form agreement is finalised), say so clearly and ensure the document contains sufficient detail to be workable.

It’s also wise to think ahead about execution. If the HOA needs to be signed by a company, consider having it executed in line with section 127 of the Corporations Act-our overview of signing documents under section 127 explains why this can streamline enforceability.

When Should Your Business Use A Heads Of Agreement?

There are several situations where an HOA is particularly useful:

• You’ve agreed on key terms and want to memorialise them while lawyers prepare the long‑form contract.
• You need exclusivity (no one shops around) during a short due diligence period.
• You’re scoping a complex partnership or joint venture and want alignment before spending on full drafting.
• You’re buying or selling a business and want headline terms signed while you finalise the detailed Business Sale Agreement.

In many deals, parties also sign a separate NDA to protect sensitive information exchanged during negotiations. If you haven’t already, consider a stand‑alone Non‑Disclosure Agreement or ensure the HOA includes robust confidentiality terms.

If your HOA is being used as a stepping stone to a fundraising or investment round, you might opt instead for a short-form Term Sheet or a Memorandum of Understanding. These documents are close cousins to an HOA and serve similar purposes-your choice often comes down to the level of detail, your appetite for binding terms, and market practice in your industry.

Key Clauses To Include In A Heads Of Agreement

While the specific content will vary by deal, most HOAs include a blend of commercial terms and “housekeeping” provisions. Here are the essentials to consider.

Commercial “Headlines”

• Parties: Full legal names and ABN/ACN (if applicable).
• Scope: A plain‑English description of the goods/services, key milestones, and deliverables.
• Price and Payment: Total price or pricing formula, payment terms, deposits, and adjustments.
• Timing: Target dates for due diligence, long‑form contract signing, and commencement.
• Conditions Precedent: What must happen before the long‑form agreement is signed (approvals, finance, board sign‑off).

Binding vs Non‑Binding

• Intention Clause: A clear statement about which parts are binding now and which are not.
• Confidentiality: Either incorporate a confidentiality clause or reference a separate NDA.
• Exclusivity (No‑Shop): If you need a window to negotiate without competition, define the period and scope.
• Costs: Who pays what (e.g., each party bears its own costs).
• Governing Law and Jurisdiction: Typically the state or territory where you operate.

Practical Protections

• Good Faith: If relevant, state that the parties will negotiate in good faith (understand this is more a behavioural guide than a silver‑bullet remedy).
• IP Ownership: If any IP may be created or shared during the interim period, include a simple ownership/licensing statement.
• Non‑Solicitation: Optional, but useful if negotiations involve introductions to key staff or clients.
• Sunset Date: A date by which the long‑form contract should be signed (or the HOA lapses).
• Termination: How either party can end the HOA (e.g., on written notice) before the long‑form is finalised.

If your deal involves ongoing ownership or control arrangements between founders or investors, plan ahead for your final governance documents. Early alignment in an HOA can make your Shareholders Agreement and Company Constitution much smoother to finalise.

How To Draft A Heads Of Agreement (Step‑By‑Step)

1) Clarify Your Intent

Decide whether the HOA will be wholly non‑binding, partly binding, or fully binding. This drives the structure and language. If you want only certain clauses to be binding (like confidentiality, exclusivity, costs and governing law), say so explicitly.

2) Capture The Deal “Headlines” Clearly

Write the commercial points in plain English. Avoid ambiguous phrases like “to be discussed” unless you are comfortable with that uncertainty. If something is essential to the deal proceeding (price or deliverables), include at least a workable outline.

3) Carve Out The Binding Clauses

Use clear headings and wording for any binding clauses so they’re obvious. Keep them self‑contained (they should make sense even if the rest of the document is non‑binding).

4) Set A Realistic Timeline

Include target dates for due diligence and signing the final agreement. A reasonable “sunset date” keeps momentum and reduces the risk of drift.

5) Plan The Path To Final Contract

State which contract you intend to sign next (for example, a Supply Agreement, Services Agreement, or Business Sale Agreement), and note who will prepare the first draft.

6) Execute Correctly

Have the right people sign, and use appropriate company execution blocks. If you’re executing as a deed, remember deeds have extra formalities-our overview of what is a deed covers the basics.

7) Move Quickly To The Long‑Form

An HOA is not the finish line. Prioritise drafting and negotiating the final contract while goodwill is high and terms are fresh. Where the HOA needs to change, use a clean process-if you’ve already got a draft contract on foot, a simple contract amendment approach may be appropriate at that stage.

Heads Of Agreement vs MOU vs Term Sheet: What’s The Difference?

These terms get used interchangeably, but there are subtle differences:

• Heads Of Agreement: Common in Australia across industries. Often mixes non‑binding commercial terms with a few binding housekeeping clauses.
• Memorandum of Understanding (MOU): Similar concept-parties set out intentions at a high level. In many cases an MOU is more likely to be non‑binding, but the label alone doesn’t decide it. Intent and wording do. See our guide to MOU vs contract for how enforceability is assessed.
• Term Sheet: Common in investment and tech deals-short bullet‑point terms, often heavily commercial with defined timelines. A Term Sheet can also include binding confidentiality and exclusivity.

Whatever you call it, ensure the document reflects what you actually intend-particularly around binding effect, exclusivity, and timelines.

How Do You Make Sure Your HOA Does What You Expect?

Here are practical tips to avoid common pitfalls:

• Say The Quiet Part Out Loud: State clearly which sections are binding and which are not. Don’t bury this in the fine print.
• Mind The Gaps: If price, deliverables, or other core items are “to be agreed,” your document is less likely to be binding. That might be fine-just be deliberate about it.
• Keep Consistency: If you’ve already got a draft of the final contract, make sure the HOA aligns to avoid contradictions.
• Use Simple, Active Language: Avoid vague obligations (“parties will aim to…”) unless you’re comfortable with that being non‑enforceable.
• Be Realistic On Timelines: Short, achievable dates help maintain focus; rolling extensions can sap momentum.
• Protect Your Information: If sensitive information is in play, don’t rely on a thin confidentiality clause-use a robust Non‑Disclosure Agreement.

Finally, if you’re negotiating with co‑founders or investors, settle the commercial principles early so your Shareholders Agreement reflects genuine consensus (decision‑making, dilution, exits, restraints) rather than last‑minute compromises.

Negotiation Tips For Small Businesses

Even a short HOA benefits from good negotiation discipline. A few reminders:

• Prioritise Your “Must‑Haves”: Decide what you need now versus what can wait for the final contract.
• Set The Tone: An HOA often sets expectations for how the rest of the deal will run-be clear, responsive, and practical.
• Use Exclusivity Wisely: Exclusivity is valuable but can stall if overlong; time‑box it and tie it to progress milestones.
• Escalate Early: If a sticking point emerges, escalate to decision‑makers before goodwill fades.
• Keep Communication Written: Confirm key points over email to avoid misunderstandings.

Where a deal involves multiple entities or complex obligations, it can help to confirm who has authority to sign and how they’ll execute-company execution formalities under section 127 are a common and efficient option.

Common Mistakes We See With Heads Of Agreement

Here are traps that regularly cause headaches:

• Unclear Binding Status: The document calls itself “non‑binding,” but reads like a full contract. That’s risky.
• Missing Essentials: Critical terms (price, scope) left as “TBA,” which later creates leverage problems or disputes.
• Over‑Long Exclusivity: A long no‑shop period with no obligation to progress can stall your deal and shut out alternatives.
• IP Ownership Oversights: No mention of who owns drafts, designs, or proposals exchanged during negotiations.
• Silence On Costs: One party assumes the other will pay for due diligence or drafting; the other assumes the opposite.
• No Sunset: Without a clear end date, negotiations drag and the HOA becomes stale.

If things change after signing, resist the urge to “patch” the HOA with informal emails. Move to the long‑form agreement as soon as you can, and manage updates through a clean variation or amendment process once that agreement is in place.

What Happens After The Heads Of Agreement?

After signing an HOA, the typical flow is:

1. Kick off due diligence and gather the documents each party needs.
2. Draft the long‑form agreement (agree who drafts first and by when).
3. Negotiate outstanding items and update schedules/specifications.
4. Finalise execution arrangements and sign the long‑form agreement.
5. Transition any binding HOA obligations (for example, exclusivity ends on signing, but confidentiality continues).

If you’re creating a corporate structure as part of the deal, align your HOA timeline with your governance documents so you’re not stuck waiting on internal sign‑offs. Sorting your Company Constitution early often saves time later.

FAQs: Heads Of Agreement For Small Businesses

Is a Heads Of Agreement the same as a contract?

It can be, but it doesn’t have to be. An HOA can be non‑binding overall, binding only for certain clauses, or fully binding if that’s what the parties intend and the document is sufficiently detailed. If you want a fully enforceable arrangement now, consider whether a short‑form contract is more appropriate for your situation.

Should I sign an HOA or just jump straight to the full contract?

If the commercial points are settled and the deal is straightforward, you can move straight to the final contract. If you need speed, exclusivity, or a clear roadmap while you complete due diligence, an HOA can be very helpful.

Do I need a lawyer for a simple HOA?

Even simple HOAs benefit from clear wording about binding effect and exclusivity. A short review can prevent unintended commitments or gaps. If the HOA leads to a major agreement (like a share sale or long‑term services arrangement), having a lawyer set it up cleanly now usually reduces negotiation time later. When you’re ready to progress, our team can also help with contract drafting or a targeted contract review.

Can we rely on emails instead of an HOA?

Emails help record discussions, but they’re rarely a complete solution. A short, well‑structured HOA ensures both sides share the same expectations, reduces the risk of misunderstanding, and sets a clear path to the final contract.

Key Takeaways

• A Heads of Agreement records the headline terms of a deal so you can progress due diligence and final drafting with confidence.
• HOAs can be non‑binding, partly binding, or fully binding-make your intent crystal clear and use plain language.
• Include essentials: parties, scope, price, timelines, conditions precedent, and carefully drafted clauses for confidentiality, exclusivity, costs, and governing law.
• Set realistic timelines and a sunset date so negotiations keep moving towards the long‑form agreement.
• Choose the right tool for the job-some deals suit an HOA, others a Term Sheet or MOU; in all cases, clarity on binding effect is key.
• Get execution right and think ahead to your governance and final contract-documents like a Shareholders Agreement or Company Constitution should align with the principles you set in the HOA.

If you’d like a consultation on preparing or reviewing a Heads of Agreement for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.