In commercial leasing, the Heads of Agreement (or HOA) stage is often viewed as a procedural step - a handshake deal before the “real” documents arrive. However, this early-stage agreement plays a critical legal and commercial role. For both landlords and tenants, what is set out (or omitted) in a Heads of Agreement can shape the final lease, limit negotiating power, and, in some cases, even bind the parties in ways they did not intend.
This article explores why careful attention to the Heads of Agreement is essential and how to use this document strategically.
What is a Heads of Agreement?
A Heads of Agreement is a preliminary document that outlines the key commercial terms the parties have agreed upon for a future lease. Typically prepared by agents, it includes terms such as:
- Rent and outgoings
- Lease term and options
- Commencement date
- Incentives (e.g. rent-free period, fit-out contribution)
- Permitted use
- Responsibility for fit-out or repairs
While the intention may be for the HOA to be “non-binding”, the reality is more nuanced — and often more risky.
Can a Heads of Agreement Be Legally Binding?
Yes - and unintentionally so. Whether an HOA is legally binding depends not only on what is written, but also on how the parties behave.
Courts will look at:
- Language used: Does the HOA say it is “subject to contract”?
- Conduct: Have the parties acted as though a lease already exists? For example, has the tenant taken possession or begun fit-out?
- Completeness: Are all material terms of the lease present and agreed?
If these elements are present, a court may find that the parties are already bound — even if the formal lease has not been signed. This can be problematic, particularly if either party was relying on further negotiations or conditions.
The Commercial Consequences of a Poorly Drafted HOA
A poorly prepared Heads of Agreement can lead to:
- Reduced negotiation leverage: If material terms are already “agreed”, landlords or tenants may lose the ability to negotiate more favourable terms later.
- Legal ambiguity: Disputes may arise over whether the HOA was binding, especially if one party seeks to walk away.
- Misaligned expectations: Terms like “market rent” or “standard make good” may mean different things to different parties unless clearly defined.
- Missed protections: Key matters such as security deposits, essential terms, or landlord works might be overlooked in the HOA and harder to introduce later.
Strategic Use of the Heads of Agreement
Handled correctly, a Heads of Agreement can be a useful commercial roadmap — without creating legal risk. Some best practices include:
- Involve legal advisors early: Even if the lease will follow later, your lawyer can ensure the HOA does not inadvertently bind the parties or create risk.
- Clearly state intentions: Use language such as “subject to execution of formal lease” to clarify that the document is not binding.
- Specify only what is agreed: Do not include placeholder terms, vague descriptions, or items still under negotiation.
- Confirm mutual understanding: Ensure that all parties — including agents — understand the significance and limits of the HOA.
- Keep the document clean: Avoid mixing binding and non-binding clauses unless the legal effect is carefully managed.
Why Pine Lawyers?
At Pine Lawyers, we guide clients through every stage of a lease — not just the paperwork. We help our clients ensure that early negotiations support their broader commercial objectives, avoid legal missteps, and position them to negotiate strategically when it matters most.
We work with property owners, tenants, and commercial agents to ensure that HOAs are properly framed and legally sound from the start.
