Why Enter Into A Heads Of Agreement? (2026 Updated)

You’ve found the right buyer for your business, a potential investor wants in, or you’re negotiating a new commercial deal that could be a game-changer.

Everything feels promising… but you’re not quite ready to sign the “final” contract yet.

That’s where a Heads of Agreement (often called a “HoA”) can help. It’s a practical way to capture what you and the other party have agreed so far, while you work through the details before signing the main contract.

This article is updated to reflect current New Zealand commercial practice and the way businesses typically negotiate deals today (including the increased focus on clear written records and risk management, especially in digital and fast-moving transactions).

Let’s break down what a Heads of Agreement is, why people use it, what it should include, and the legal traps to avoid.

What Is A Heads Of Agreement (And Is It Legally Binding In NZ)?

A Heads of Agreement is a document used to record the key commercial terms that parties have agreed in principle, before they enter into a detailed, final agreement.

You’ll commonly see Heads of Agreement used for:

• buying or selling a business (asset sale or share sale)
• investment or funding arrangements
• partnership and joint venture arrangements
• major supplier/customer deals
• commercial property deals (including lease negotiations)

The big question most people have is: is it legally binding?

In New Zealand, a Heads of Agreement can be binding, partly binding, or non-binding depending on:

• how it’s written (the wording matters a lot)
• whether it says the parties intend to be bound
• whether the “essential terms” are agreed
• the parties’ behaviour (for example, acting as if a deal is already done)

It’s also common for a Heads of Agreement to be non-binding overall, but still include certain clauses that are expressly binding (like confidentiality or exclusivity).

If you’re aiming for something non-binding, it needs to be drafted carefully. Otherwise, you can end up in the awkward position of thinking you’re “just negotiating” while the other side argues you’ve already made a deal.

When Should You Use A Heads Of Agreement?

A Heads of Agreement is most useful when you’re aligned on the big picture, but you still need time (and usually professional input) to finalise the details.

Here are common situations where an HoA makes sense.

When You Want To Lock In Key Commercial Terms Early

Negotiations can go in circles if you don’t capture what’s already agreed.

A Heads of Agreement helps by setting out the headline terms, such as:

• price (or pricing methodology)
• what’s being bought/sold or provided
• deposit and payment timing
• key dates (due diligence period, signing, settlement/completion)
• conditions that must be satisfied before the final agreement is signed

This is especially helpful when there are multiple decision-makers involved, or where you need internal approvals (e.g. a board or shareholders).

When You Need Time For Due Diligence

Many deals should not move to a final contract until due diligence is done (financial, legal, operational).

An HoA can set a due diligence period and clarify what happens if due diligence reveals issues.

If you’re buying a business, for example, you might later move to a formal Legal Due Diligence Package once the HoA sets the framework and timing.

When You Need A Framework Before Drafting A Detailed Contract

Drafting a full contract can take time and money. An HoA can reduce wasted effort by ensuring both sides are aligned on the “must-have” terms before lawyers start negotiating the long-form document.

This is a practical step if you expect to move into documents like an Asset Sale Agreement, a shareholder arrangement, or a complex services contract with schedules and statements of work.

When You Want Exclusivity (So The Other Party Doesn’t Shop The Deal Around)

Sometimes you’ll invest time and money in due diligence, planning, or preparing documents - and you don’t want the other party negotiating with someone else at the same time.

An HoA can include an exclusivity clause (often called a “no shop” clause), usually for a limited time.

Because exclusivity can materially affect your negotiating position, it’s important to be clear on:

• how long exclusivity lasts
• what conduct is prohibited (e.g. soliciting offers vs responding to approaches)
• what happens if exclusivity is breached

Key Benefits Of A Heads Of Agreement (And Why Businesses Use Them)

Used properly, a Heads of Agreement isn’t “extra paperwork”. It’s a tool to reduce risk and keep negotiations moving.

1) It Reduces Misunderstandings

Even when negotiations feel friendly, people remember conversations differently. A written HoA helps ensure you’re actually aligned on the key points.

This is particularly important where there are complex variables like earn-outs, staged payments, handover periods, or performance targets.

2) It Speeds Up The Final Contract Process

A well-structured HoA becomes a roadmap for the final contract. Instead of re-negotiating from scratch, lawyers can draft and refine around the agreed commercial deal.

That can mean fewer delays, fewer surprises, and a smoother path to signing.

3) It Lets You Make Some Parts Binding Without “Finalising Everything”

One of the most practical reasons to use an HoA is to make specific terms binding now, while leaving the rest for the final contract.

Common binding clauses include:

• confidentiality (especially if you’re sharing sensitive business information)
• exclusivity (as discussed above)
• costs (who pays legal/accounting fees)
• governing law and jurisdiction (usually New Zealand)

For confidentiality, you may also decide a standalone NDA is more appropriate depending on the situation. It’s the same idea: be clear about what information is protected and how it can be used.

4) It Helps Maintain Momentum (Without Rushing Into The Wrong Contract)

Deals often fall apart when there’s a long gap between “yes, we want to do this” and “we have signed documents”. An HoA can keep everyone moving in the same direction.

At the same time, it helps you avoid rushing into a final agreement before you’ve properly thought through the risks, compliance requirements, and operational realities.

What Should A Heads Of Agreement Include?

There’s no single “perfect” template for a Heads of Agreement, because the right content depends on the deal.

But in practice, most HoAs cover the following areas.

The Parties And The Deal Structure

Start with clarity: who is doing the deal, and what is the deal?

• full legal names of the parties (and company numbers where relevant)
• what’s being bought/sold or agreed (shares, assets, services, etc.)
• the intended structure (for example, whether a business sale is likely to be an asset sale or share sale)

If the deal is an investment or involves company ownership changes, the HoA should be consistent with how ownership will actually work in the company.

That’s also where documents like a Company Constitution and a Shareholders Agreement can become critical later, because they govern how decisions are made, what rights shareholders have, and what happens if someone wants to exit.

Price, Payment Terms, And Adjustments

This is where you capture the “commercial heart” of the deal, including:

• purchase price or fees
• how and when payments will be made
• any deposits
• earn-outs or performance-based payments (if relevant)
• any adjustment mechanisms (e.g. stock valuation, working capital adjustments)

If you’re not ready to lock in an exact price, the HoA can still set out a pricing methodology (for example, based on EBITDA multiples, independent valuation, or a range).

Conditions Precedent (What Must Happen Before The Deal Becomes “Final”)

Conditions precedent are the things that must happen before the parties are obliged to complete the deal.

Common examples include:

• due diligence being completed to your satisfaction
• board/shareholder approval
• finance approval
• landlord consent (for leases)
• key contracts being assigned or re-signed
• regulatory approvals (where relevant)

This section matters because it’s often the difference between an HoA being a “useful framework” and an HoA creating pressure to proceed even when red flags appear.

Timelines And Process

HoAs work best when they don’t just list terms, but also set the process for next steps:

• due diligence start/end dates
• who drafts the first version of the long-form agreement
• target signing date
• target completion/settlement date

This helps keep the deal moving and reduces the risk of “drifting negotiations” that lose momentum.

Confidentiality, Exclusivity, And Other Binding Clauses

If you want parts of the HoA to be binding, you should say so clearly.

It’s also the place to deal with sensitive topics like:

• what information must remain confidential
• public announcements (who can say what, and when)
• exclusivity and “no shop” requirements
• return or destruction of confidential information if the deal doesn’t proceed

If customer data or employee information is being shared during due diligence, you’ll also want to be careful about privacy obligations under the Privacy Act 2020, and make sure your internal documents (like a Privacy Policy) align with how you handle that data in practice.

Common Risks And Mistakes To Avoid With A Heads Of Agreement

A Heads of Agreement can be incredibly helpful - but it can also create real risk if it’s vague, internally inconsistent, or accidentally binding.

Here are the mistakes we see most often.

Accidentally Creating A Binding Contract

This is the classic problem: you sign an HoA thinking it’s “just a summary”, but the document reads like a final agreement.

That can lead to disputes about whether:

• you’re legally required to proceed with the deal
• you can renegotiate later (or whether that’s a breach)
• you can walk away if new information comes to light

If your intention is that the deal is subject to contract (meaning it’s not binding until the final agreement is signed), the drafting needs to match that intention.

Using “Non-Binding” Language But Acting Like It’s Binding

Even if your HoA says “non-binding”, your conduct can still create risk.

For example, if you start performing the deal (supplying goods/services, transferring staff, giving the buyer control, or making public announcements), you can create confusion and potential legal arguments about what the parties really agreed.

As a general rule, treat the HoA as a planning tool, not permission to start implementing the deal, unless the HoA clearly says you can (and under what conditions).

Not Aligning The HoA With Employment And Operational Reality

If the deal involves a business sale, staff issues often become a major factor.

The HoA should at least flag key employment assumptions, such as:

• whether employees are expected to transfer
• whether there will be redundancies
• who is responsible for employee liabilities up to completion

When you later document the arrangement, your employment documentation (like an Employment Contract) and any consultation obligations must line up with what you’re actually doing in practice.

Forgetting About Restraints, IP, And Ownership Of “What You’re Buying”

Many deals hinge on assets you can’t physically touch, such as:

• brand names and domain names
• customer lists
• software and databases
• supplier arrangements
• processes, recipes, or know-how

If those aren’t clearly described early, you can end up negotiating the most important part of the deal too late (or discovering the seller doesn’t actually own what you thought you were buying).

This is also where restraint of trade clauses and non-solicitation terms often come up - and they need to be tailored so they’re more likely to be enforceable and reasonable in scope.

Leaving Dispute Pathways Unclear

Even though an HoA is often “pre-contract”, it’s still worth being clear about process if things go wrong.

Common options include:

• good faith negotiation requirements
• mediation before court proceedings
• which country’s laws apply (usually NZ law for NZ businesses)

This won’t prevent every dispute, but it can reduce the cost and stress if a disagreement happens.

Key Takeaways

• A Heads of Agreement records the key terms of a deal before the parties sign the final, detailed contract.
• In New Zealand, a Heads of Agreement can be binding, partly binding, or non-binding depending on how it’s drafted and how the parties behave.
• Heads of Agreement are most useful when you want to align early on price, structure, timelines, and conditions (like due diligence) without rushing into a final agreement.
• A well-drafted HoA can reduce misunderstandings, speed up final contract drafting, and allow specific clauses (like confidentiality and exclusivity) to be binding.
• Common risks include accidentally creating a binding agreement, acting like the deal is final before it is, and failing to address critical issues like employee liabilities, IP ownership, and key deal conditions.
• If the deal involves ownership changes or incoming investors, it’s important that the HoA aligns with longer-term documents like a Company Constitution and Shareholders Agreement.

If you’d like help drafting or reviewing a Heads of Agreement (or moving from an HoA to the final contract), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.