Heads of Terms: Legal Mistakes Australian Businesses Should Avoid Before Signing

A heads of terms document can feel harmless because it often arrives early, looks short and is sometimes labelled non-binding. That is exactly why many Australian businesses get caught out. Common mistakes include treating it like a casual summary, assuming every clause is non-binding, and relying on verbal promises that never make it into the document. Another frequent problem is agreeing to commercial points too early, then discovering later that the lease or contract reflects a much worse deal than expected.

A proper heads of terms review helps you spot those problems before you sign a lease, pay a deposit, commit to fitout costs or lose leverage in negotiations. The key question is not just whether the document is legally binding overall. It is which parts may still create obligations, what practical commitments you are making, and whether the detailed agreement is likely to follow the same commercial position. If you are about to sign heads of terms for premises, a supply arrangement or another business deal, here is what to sort out first.

Overview

Heads of terms usually set out the commercial deal the parties intend to document in a formal agreement later. Even where the document is mostly non-binding, some clauses can still be enforceable and many provisions will shape the final contract or lease in ways that are hard to unwind.

A heads of terms review should focus on legal effect, commercial accuracy and negotiation risk before you sign.

• Whether the document or any part of it is binding
• The key commercial terms, including rent, term, options, incentives, exclusivity and deposits
• Who pays legal fees, fitout costs, make good costs and outgoings
• Conditions that must be met before the deal proceeds
• Whether landlord, financier, franchisor or third party consent is needed
• Any exclusivity, confidentiality, break fee or no-shop obligations
• How much flexibility remains for the formal lease or contract
• What promises need to be written in, instead of left to conversations or emails

What Heads of Terms Review Means For Australian Businesses

A heads of terms review means checking what you are really agreeing to before the long form contract is drafted. For many businesses, this is the stage where leverage is highest and mistakes are cheapest to fix.

In Australia, heads of terms may also be called a term sheet, letter of intent, memorandum of understanding or offer to lease. The label matters less than the wording. Courts and counterparties look at what the document says, what the parties intended and which clauses are expressed to be binding.

For businesses dealing with commercial leases, this is especially important. Founders often assume the real legal work starts when the lease arrives. In practice, the heads of terms can lock in the core economics and put pressure on you to accept detailed lease terms that follow the same commercial structure.

That matters in real founder moments, such as:

• before you sign a lease for your first shop, warehouse or office
• before you spend money on setup, fitout or equipment for the premises
• before you stop looking at other sites because a landlord wants exclusivity
• before you rely on a rent-free period or contribution that is only mentioned casually
• before you accept the provider's standard terms for occupancy, storage or serviced premises

Heads of terms are not automatically harmless

The biggest misunderstanding is that non-binding means no risk. A document can say it is subject to contract and still contain binding obligations, such as confidentiality, exclusivity, payment of costs, access rights or a requirement to negotiate in good faith.

Even if a clause is not legally enforceable on its own, it can still create commercial pressure. Once you have signed off on rent, term, review mechanism, incentive structure or make good obligations, changing those points later may be difficult.

Commercial leases are a common pressure point

In lease negotiations, heads of terms often cover:

• the premises and permitted use
• lease term and option periods
• starting rent and review method
• outgoings and utility costs
• fitout contributions and rent-free periods
• security, such as a bank guarantee or bond
• make good obligations at the end of the lease
• special conditions, including exclusivity or landlord works

These are not minor details. If they are vague, inconsistent or one-sided at heads of terms stage, the formal commercial lease usually will not improve the position unless you push back early.

Why review at this stage matters

Reviewing heads of terms early can save time and money. It can also stop a business from committing to a deal that looks affordable on paper but becomes expensive once legal costs, fitout obligations, outgoings and end-of-term requirements are added.

This is also the best point to clarify what you need operationally. A café may need certainty about grease trap access, ventilation and outdoor seating. A retail business may care most about signage rights, exclusivity and trading hours. A warehouse user may need clarity on loading areas, racking approvals and permitted use. Those practical issues should not be left until after the key deal document is signed.

Legal Issues To Check Before You Sign

Before you sign, check both the legal effect of the document and the practical business commitments it creates. The main risk is agreeing to a headline deal that hides expensive obligations or leaves critical issues unresolved.

1. Is any part of the document binding?

Read the binding status clause carefully. Some heads of terms are expressly non-binding except for specific clauses. Others are partly binding, or use mixed language that creates uncertainty.

Pay close attention to clauses dealing with:

• confidentiality
• exclusivity or no-shop obligations
• deposits or holding fees
• payment of legal or negotiation costs
• access to premises before lease commencement
• dispute resolution or governing law
• good faith negotiation obligations

If the wording is unclear, do not assume the safer interpretation applies. Unclear drafting creates risk for both sides.

2. Are the commercial terms complete and accurate?

The formal contract usually follows the commercial deal already agreed. If the heads of terms leaves too much open, the stronger party may fill in the gaps later.

For a commercial lease, confirm the basics in writing, including:

• the exact premises
• the commencement date and whether it depends on works, approvals or fitout completion
• base rent, GST treatment and rent review method
• whether outgoings are included or charged separately
• the lease term and any options to renew
• incentives, such as rent-free periods or landlord contributions
• security requirements, including amount and form
• the permitted use and any restrictions on trading

If an issue matters commercially, it should appear clearly in the written terms. A phone call or side email is not enough.

3. Who pays for what?

Cost allocation is where many deals become more expensive than expected. A business may focus on rent and overlook legal fees, fitout works, make good, council approvals, utility upgrades or stamp-duty-style transaction costs where relevant.

Check whether the document deals with:

• each party's legal costs
• fitout design and construction costs
• landlord works and delivery condition
• licence fees for early access
• bond or bank guarantee costs
• make good and reinstatement costs
• ongoing outgoings, cleaning, waste and maintenance

If the document is silent, ask the question before you sign.

4. Are key conditions and approvals spelled out?

Some deals should only proceed if specific conditions are satisfied. If those conditions are missing or drafted too loosely, you may be committed before the site or arrangement is actually workable.

Depending on the transaction, conditions might include:

• board or internal approval
• finance approval
• franchisor approval
• landlord consent for assignment or sublease
• development approval, fitout approval or planning approval
• satisfactory due diligence
• agreement on formal lease or contract terms

The document should also state what happens if a condition is not met and when the condition period ends.

5. Does the permitted use actually fit your business?

A short phrase like retail or office can be too narrow or too vague. If you need to provide a specific service, install specialised equipment or trade in a particular way, the permitted use should reflect that.

This matters before you sign a lease because use restrictions can affect approvals, insurance, fitout and future growth. If you later expand your product range or service model, you may need landlord consent. It is better to negotiate suitable wording at the start than ask for flexibility later.

6. Are termination and exit issues hidden in the detail?

Some heads of terms include break fees, forfeitable deposits or one-sided rights to walk away. Others are silent on what happens if formal documents are never agreed.

Check whether the document addresses:

• refunds of any deposit or holding payment
• when exclusivity ends
• which party can terminate and why
• whether either party can walk away if long form terms are not agreed
• what happens to confidential information and draft documents

If the exit path is unclear, that uncertainty usually benefits the party with more bargaining power.

Common Mistakes With Heads of Terms Review

The most common mistakes happen when businesses move too fast and treat heads of terms as admin rather than negotiation. This is where founders often get caught before they sign a lease or other major agreement.

Assuming non-binding means non-serious

Many businesses sign quickly because they think the real risk only starts with the formal document. That can leave them stuck with binding side clauses, lost negotiating room or commercial concessions that are hard to reverse.

If the deal matters, review the document seriously, even if it is labelled preliminary.

Focusing only on headline rent or price

A lease with attractive base rent can still be poor value once outgoings, review mechanisms, fitout costs, security requirements and make good obligations are considered. The same applies in non-lease deals where a low upfront price hides restrictive commitments or extra charges.

Look at the whole commercial picture, not just the top line number.

Leaving important promises out of the document

Businesses often rely on statements like the landlord will do the air conditioning, the supplier will offer exclusivity, or the other side will allow early termination if approvals fail. If those promises do not appear clearly in the heads of terms, they may disappear from the final draft.

Before you rely on a verbal promise, ask for it to be written in.

Agreeing to exclusivity too early

Exclusivity can be reasonable in some negotiations, but it should be time limited and tied to genuine progress. Otherwise, you may stop exploring alternatives while the other party delays, changes the deal or never finalises the contract.

A good heads of terms review checks the exclusivity period, what each side must do during it and whether there is any clear consequence for delay.

Missing make good and reinstatement obligations

With commercial leases, make good is a frequent hidden cost. A short heads of terms might say make good applies, without explaining whether you must remove fitout, restore base building condition, repaint, recarpet or repair landlord fixtures.

Those costs can be substantial at the end of the term. It is better to narrow the obligation early than fight about it years later.

Ignoring the fitout and approval timeline

A founder may sign heads of terms expecting to trade quickly, only to discover that commencement depends on landlord works, centre approval, development approval or lengthy fitout consent processes. Delay can mean rent starts before revenue, or staff and inventory are arranged too early.

The document should reflect a realistic timeline and set out who is responsible for each step.

Not checking the legal identity of the parties

It sounds basic, but errors here are common. The named landlord may not own the property directly. The contracting entity on your side may also matter if a personal guarantee, bank guarantee or group support is requested.

Before you sign, confirm the correct legal entities and whether directors or related entities are expected to provide security.

Assuming standard terms are standard risk

Serviced offices, storage arrangements, concession spaces and short form occupancy deals often arrive as standard paperwork. That does not mean the terms are balanced. Automatic renewals, broad indemnities, access limits and fee increases can all appear in standard documents.

A heads of terms review is still useful before you accept the provider's standard terms, especially where location and timing put pressure on the deal.

Spending money too early

Businesses sometimes commit to architects, fitout builders, signage, stock or recruitment based on heads of terms alone. If the formal agreement stalls or the conditions are not met, those sunk costs may be hard to recover.

Before you spend money on setup, check whether the deal is genuinely settled and what happens if it does not proceed.

Failing to line up the formal document with the heads of terms

Even a well-drafted heads of terms can lose value if nobody checks the final lease or contract against it. Changes often appear in definitions, annexures, incentive clauses, review formulas or special conditions.

Once the long form agreement arrives, compare it carefully against the signed heads of terms and raise differences straight away.

FAQs

Are heads of terms legally binding in Australia?

Sometimes. The whole document may be non-binding, but specific clauses, such as confidentiality, exclusivity, costs or deposits, can still be enforceable. The answer depends on the wording and the parties' objective intention.

Do I need a lawyer to review heads of terms before signing a commercial lease?

You are not legally required to get advice, but it is often sensible. Early contract review can help you fix unclear rent terms, incentive wording, make good obligations, security requirements and conditions before they harden into the lease.

What is the difference between heads of terms and a lease?

Heads of terms usually outline the main commercial deal. The lease is the detailed legal document that governs occupation, rights, obligations, defaults, assignment, repair and end-of-term issues. The lease often follows the commercial position set in the heads of terms.

Can I change my mind after signing heads of terms?

Possibly, but it depends on what the document says. If there are binding clauses, an exclusivity period, a deposit or agreed process obligations, walking away may have legal or commercial consequences.

What should I check first in a heads of terms review?

Start with binding status, key commercial terms, who pays what, conditions and approvals, the permitted use, and any exclusivity or deposit provisions. Those points usually determine whether the document is safe to sign and whether the deal is workable.

Key Takeaways

• A heads of terms review is about checking what you are really agreeing to before the formal lease or contract is prepared.
• Do not assume a non-binding label removes all legal risk, because some clauses may still be enforceable.
• For commercial leases, confirm rent, term, options, outgoings, incentives, security, fitout, make good and permitted use before you sign.
• Write important promises into the document instead of relying on conversations, side emails or assumptions.
• Watch for exclusivity periods, deposits, cost clauses and conditions that can limit your ability to walk away.
• Review the final lease or contract against the heads of terms so the detailed drafting does not shift the deal against you.

If you want help with lease terms, exclusivity clauses, incentive wording, make good obligations, you can reach us on 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

Official Sources to Check

Rules and regulator guidance can change. Check the current official material most relevant to this issue before relying on the article:

• ACCC: Contracts and unfair contract terms