Heads of Agreement vs Letter of Offer in New Zealand

You have agreed on the commercial deal in principle, but the paperwork in front of you is labelled a heads of agreement or a letter of offer. That is often the point where founders and business owners get caught. A common mistake is assuming the document is “just preliminary” and signing without checking whether any clauses are already binding. Another is relying on verbal promises that never make it into the written terms. A third is focusing on price and timing, while missing exclusivity, confidentiality, break fees, landlord consent, finance conditions, or personal guarantee wording.

A careful heads of agreement letter of offer review helps you work out what the document actually does, what risks it creates now, and what still needs to be negotiated in the full contract. That matters whether you are taking a lease, buying a business, selling shares, bringing in an investor, or locking in a major supply or services deal. Before you sign, you need clarity on what is binding, what is conditional, and what happens if the full agreement never gets signed.

Overview

A heads of agreement and a letter of offer are both pre-contract documents, but they do not always have the same legal effect. In New Zealand, the label on the document matters less than the wording, the surrounding negotiations, and whether the parties intended to be bound.

The main job of a review is to separate the commercial outline from the legally enforceable parts, so you know exactly what you are committing to before you sign and before you spend money on setup, due diligence, fit-out, or advisers.

• Whether the document is intended to be legally binding, partly binding, or non-binding
• Which clauses are immediately enforceable, such as confidentiality, exclusivity, deposit terms, costs, or dispute processes
• What key commercial points are settled, including price, scope, timing, milestones, and completion steps
• What conditions must be satisfied, such as finance approval, landlord consent, board approval, due diligence, or regulatory checks
• Whether essential terms are missing, vague, or inconsistent with later draft agreements
• Who bears risk if the deal falls over, including break costs, refunds, or liability for work already started
• Whether any side promises need to be written into the document before you rely on them

What Heads of Agreement Letter of Offer Review Means For New Zealand Businesses

A heads of agreement letter of offer review means checking whether a “preliminary” document already creates enforceable obligations and whether its wording protects your position if the final deal changes or falls apart.

In practice, New Zealand businesses usually see these documents in a few recurring situations. A landlord may issue a letter of offer for commercial premises. A buyer and seller may sign heads of agreement before a business sale and purchase agreement. Investors may want a short-form term sheet style document before full subscription and shareholders documents are prepared. Suppliers and commercial partners also use early-stage offer documents to lock in headline terms.

The problem is that business owners often treat all of these as informal, when they are not. Some clauses can bind you straight away, even if the final long-form agreement is still being drafted. If the wording is unclear, you can end up arguing about whether you were committed, whether you could negotiate further, or whether you breached exclusivity by speaking to another party.

Heads of Agreement vs Letter of Offer, What Is The Difference?

The practical difference usually comes down to context and drafting rather than a strict legal category. A heads of agreement often records the key commercial terms of a broader proposed deal. A letter of offer often comes from one side, such as a landlord or seller, setting out an offer that becomes effective if accepted.

Either document can be:

• non-binding except for specific clauses
• partly binding, where some obligations apply now and the main transaction is still conditional
• fully binding in substance, even if the parties expected more detailed documents later

This is why the title alone does not answer the risk question. Before you sign, you need to read the actual language carefully. Phrases such as “subject to contract” can help, but they are not a complete answer if other parts of the document suggest the parties intended to be bound immediately.

Why Founders And SMEs Need To Slow Down At This Stage

The main risk is committing too early without noticing it. A founder might sign a lease offer to secure a site quickly, then discover the fit-out timetable is unrealistic, the outgoings are higher than expected, or personal guarantee wording appears later because the early offer gave too much away.

Another common scenario is a business acquisition. The parties sign heads of agreement with a purchase price and settlement date, but the due diligence clause is too narrow, there is no clear adjustment mechanism for stock or debtors, and exclusivity prevents the buyer from walking away cleanly after problems are uncovered.

These are not drafting technicalities. They directly affect cash flow, bargaining power, and whether you can safely proceed.

What A Review Usually Covers

A proper review does more than correct wording. It checks whether the proposed document matches the actual deal and the way the business intends to operate after signing.

That review commonly includes:

• the legal status of the document
• commercial terms that are certain enough to work in practice
• conditions precedent and who controls them
• risk allocation if the transaction does not complete
• whether later formal documents are likely to override or repeat the current terms
• whether the other party’s standard terms shift too much risk onto your business

For New Zealand businesses, this is especially relevant when the other party has prepared the first draft. Landlords, larger suppliers, franchisors, and investors often use their own preferred wording. If you accept the provider's standard terms too quickly, you may lose room to negotiate the points that matter most to your business model.

Legal Issues To Check Before You Sign

Before you sign, the key question is not what the document is called, but what obligations it creates right now and what leverage it gives the other side.

1. Is It Binding, Non-Binding, Or A Mix Of Both?

This is the first issue to resolve. Many documents are drafted so that confidentiality, exclusivity, costs, governing law, and dispute clauses are binding, while the main transaction terms remain subject to a final agreement.

If that is the intention, the drafting should say so clearly. If you want the document to be non-binding overall, subject to a full contract and satisfactory due diligence, that should be stated in plain terms. If some parts are binding now, they should be identified clause by clause.

Ambiguity creates unnecessary risk. If your team thinks the document is just a placeholder but the other side treats it as enforceable, you can lose time and bargaining position straight away.

2. Are The Key Commercial Terms Clear Enough?

A preliminary document should still be commercially workable. If a price, rent, exclusivity period, settlement date, stock adjustment, service scope, or payment structure is unclear, that uncertainty tends to cause trouble later.

Founders often focus on the headline number and overlook the mechanics. Check details such as:

• how the price is calculated and adjusted
• whether GST treatment needs to be specified
• when deposits are payable and whether they are refundable
• what exactly is being bought, leased, supplied, or licensed
• what assumptions sit behind the timetable
• whether milestones depend on third party approvals or information you do not yet have

If the deal has moving parts, those should not be left to verbal understandings. Before you rely on a verbal promise, get it into the document.

3. What Conditions Need To Be Satisfied?

Conditions can protect your business, but only if they are drafted carefully. A finance clause, due diligence condition, board approval requirement, landlord consent condition, or regulatory approval condition should say who benefits from it, when it must be satisfied, and what happens if it is not.

Watch for conditions that sound protective but are too narrow in practice. For example, a due diligence clause that only allows review of financial information may not help if the real issue is supplier concentration, lease assignability, data privacy practices, or whether customer contracts can be transferred.

Good drafting should deal with:

• the deadline for satisfying each condition
• who must take steps to satisfy it
• whether the condition can be waived, and by whom
• whether deposits are returned if the condition fails
• whether either party can end the arrangement if deadlines pass

4. Are You Giving Away Exclusivity Too Early?

Exclusivity can be a fair request, but it should not be open-ended or one-sided. If you agree not to negotiate with others, you should be confident the other party must move quickly and incur real effort toward the transaction.

Check the exclusivity period, any carve-outs, and whether the other party has duties during that period. If you are the buyer or tenant, you may want enough time for due diligence and approvals. If you are the seller or landlord, you may want obligations on the counterparty to provide information, pay for advisers, or progress documents without delay.

5. Who Pays Costs If The Deal Does Not Proceed?

Costs clauses are often skimmed over, but they matter. You may be paying legal fees, valuation costs, accountants, technical consultants, fit-out planning expenses, or document preparation fees before the main agreement is signed.

The document should spell out:

• which costs each side bears
• whether one party reimburses the other in any scenario
• whether a deposit is forfeited or refunded
• whether break fees apply
• whether any pre-contract work is done at your own risk

This is where founders often get caught. They commit to external spend before the condition dates and then discover the deal was never firm enough to justify that spend.

6. Does The Document Align With The Full Contract You Expect Later?

The heads of agreement or letter of offer should not create a false sense of certainty if the later long-form contract will contain major additional obligations. This is especially common in leases, supply arrangements, investment deals, and business acquisitions.

For example, a short letter may say the tenant will provide a guarantee “if required”, but the lease later includes a broad personal guarantee and indemnity. A business sale heads may say staff transfer “as agreed”, but the final documents require more warranties, restraints, and completion actions than the buyer expected.

Ask whether the short-form document already points to major later issues, including:

• guarantees or security
• warranties and indemnities
• restraint clauses
• assignment restrictions
• default rights
• termination rights
• insurance obligations
• ongoing reporting or performance commitments

7. Are There Industry Or Transaction-Specific Risks?

The legal review should fit the transaction. A commercial lease offer may need close attention to premises description, permitted use, outgoings, fit-out rights, rent review, and landlord works. A business sale heads may need detail on assets, stock, employees, intellectual property, customer contracts, and restraint wording. A supply deal may need scope, service levels, data handling, liability clauses, and renewal mechanics.

Where privacy, consumer-facing obligations, or sector-specific approvals sit behind the deal, they should not be ignored just because the document is only preliminary. If the transaction assumes customer data will be transferred, software will be licensed, or regulated activities will continue under the new arrangement, that needs early checking before you sign.

Common Mistakes With Heads of Agreement Letter of Offer Review

The most common mistake is treating a preliminary document as harmless when it may already shape the whole negotiation and expose your business to real cost.

Signing To “Hold The Deal” Without Reading The Binding Clauses

Business owners often sign quickly because they want to secure the opportunity. That is understandable, especially in a competitive lease, acquisition, or investment process. The trouble is that the clauses with immediate effect are often buried among commercial summaries.

If confidentiality, exclusivity, cost responsibility, deposit treatment, or dispute wording is binding now, your leverage can change the moment you sign.

Leaving Key Terms For Later

Some points genuinely can wait for the full contract, but essential commercial terms should not. If the document leaves scope, price adjustments, timing, consent requirements, or the treatment of major liabilities to future discussion, you are creating room for disagreement at the stage when you have already invested time and money.

Later negotiations rarely become easier once one side feels the deal is effectively locked in.

Assuming “Subject To Contract” Solves Everything

Those words can help, but they are not magic. If the document also says the parties agree to proceed on stated terms, grants exclusivity, requires payment of a deposit, or sets out obligations that look complete, there may still be enforceable elements.

The whole document needs to be read together. That is why a heads of agreement letter of offer review should focus on substance, not labels.

Relying On Side Conversations

Founders often hear reassuring statements such as “we would never enforce that”, “the guarantee is just standard”, or “we can sort the rest out later”. Those comments may be genuine, but they are not a reliable substitute for drafting.

If a point matters to your decision, record it properly. Oral discussions can guide negotiations, but they should not be the only protection your business relies on.

Ignoring Timing Pressure

Tight deadlines are common, but they can push businesses into avoidable mistakes. If the document gives you a short acceptance period, ask whether the urgency is real and whether an extension is possible to review the legal and commercial issues properly.

Pressure is not a reason to sign unclear terms. In many cases, a short, targeted negotiation on the front-end document prevents a much bigger dispute later.

Forgetting The Deal Has To Work Operationally

A legal review should reflect real business operations. If your team needs landlord access for fit-out, board approval, finance sign-off, key supplier consents, or a staged handover, the document should match that reality.

Problems often arise because the signatory and the operational team are solving different problems. The signatory wants to secure the deal. The operations team later discovers the conditions, dates, or assumptions were never realistic.

FAQs

Is a heads of agreement legally binding in New Zealand?

It can be. Some heads of agreement are non-binding, some are partly binding, and some may be treated as binding in substance. The wording and the parties’ intention matter more than the title.

Is a letter of offer the same as a final contract?

No, not usually. A letter of offer is often an early-stage document that sets out key terms for a later formal agreement. But some clauses may still be enforceable immediately, so it should be reviewed carefully before signing.

What clauses are most likely to bind me before the full agreement is signed?

Common examples include confidentiality, exclusivity, deposits, cost responsibility, dispute procedures, and sometimes acceptance mechanics or completion steps. Always check whether the document says specific clauses are intended to be binding.

Can I rely on verbal promises if they are not in the document?

That is risky. If a promise matters to price, timing, approvals, fit-out, scope, or liability, it should be written into the document or clearly reserved for the final agreement.

When should a business get legal review of a heads of agreement or letter of offer?

Ideally before signing and before spending money on setup, due diligence, consultants, or negotiations based on the assumption the deal is secure. Early contract review is usually faster and cheaper than fixing a poorly drafted preliminary document later.

Key Takeaways

• A heads of agreement or letter of offer is not automatically harmless just because it is an early-stage document.
• In New Zealand, the legal effect depends on the wording, the commercial context, and whether the parties intended some or all terms to bind immediately.
• Before you sign, check binding clauses, key commercial terms, conditions, exclusivity, costs, deposit treatment, and any promises you are relying on.
• Do not assume “subject to contract” removes all risk. The substance of the document matters.
• Short-form deal documents should line up with the full contract you expect later, especially around guarantees, warranties, liability, and termination rights.
• Early review can help you negotiate clearer terms and avoid spending money on a deal that is not properly protected.

If you want help with binding clause analysis, exclusivity and deposit terms, condition drafting, or commercial lease and business sale negotiation points, you can reach us on 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.