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Sale of Retirement Village: Do I need a Heads of Agreement?

By Helen Kay06 Jul 2018

Selling your Retirement Village can be a daunting prospect, especially if you have not been through this process before. How can you maximise your chances of achieving a successful sale? How do you ensure that this sale goes as smoothly as possible and that there are no nasty surprises along the way? One way to help achieve this is to engage the support and assistance of experts who can assist you through the transaction. Experienced business brokers, accountants and lawyers can all be invaluable in the successful sale of your Village.

Another way is to ensure that the deal is documented correctly and often this process starts with a Heads of Agreement.  

What is a Heads of Agreement?

A Heads of Agreement is a pre-contractual document which identifies, broadly, the terms of the arrangement between the parties for the proposed transaction. The purpose of a Heads of Agreement is for the parties to effectively set out the framework of a formal Contract of Sale – which will be entered into in more detailed terms at a later date.

There are other documents which could alternatively be prepared for the same purpose as a Heads of Agreement, such as a Memorandum of Understanding or a letter of intent. While these documents all do essentially the same thing, for clarity, we will continue to refer to a Heads of Agreement in this article.

What does a Heads of Agreement contain?

A Heads of Agreement can be significant in the transaction process as it allows the parties to record and identify the key agreed terms, such as the purchase price and timeframes. The Heads of Agreement should also address the parties’ position regarding exclusivity and confidentiality so that negotiations can move forward in a more secure environment. Although Heads of Agreement are generally considered not to be binding (we will discuss this further below) they can certainly assist in refining the negotiations and enabling the parties to reach a binding contractual arrangement.

Generally, a Heads of Agreement can provide:

  • a broad framework of the arrangement;
  • a record of the key terms as agreed between the parties;
  • an agreed position regarding pre-contractual matters such as exclusivity, confidentiality and due diligence periods; and
  • a degree of comfort to the parties that they are heading in the same direction and that an agreement is made on the matters set out above before incurring significant costs.

In many circumstances, a Heads of Agreement can be an asset during the negotiation phase of the sale of a retirement village and should be considered by parties who may require some assurance from the other side.

Are Heads of Agreement binding?

In order for a Heads of Agreement (and the terms within it) to be enforceable, it must be stated to be binding on the parties.

As mentioned above, Heads of Agreement are generally considered to be non-binding. This is because they are prepared on the basis that an enforceable contract will be entered into down the track. However, this position can be displaced where the phrases used in the Heads of Agreement indicate that the parties did in fact intend for the Heads of Agreement (in whole or in part) to be binding.

The most common example of this is where the Heads of Agreement contain a clause which expressly identifies certain clauses which the parties do intend to be binding. Usually these clauses will record that provisions such as confidentiality and exclusivity are to be binding.

Generally, the inclusion of a clause such as this is not contentious as it protects both parties and allows negotiations to move forward with some form of protection.

If it is the parties’ intention for the entire Heads of Agreement to be binding, it will need to consistently evidence this intention. The Heads of Agreement should include a clause expressing that the agreement is intended to be legally binding on the parties. It is also important to:

  • ensure the parties’ details are correctly recorded in the Heads of Agreement so that there can be no confusion about which entities were to be bound by the Heads of Agreement;
  • include all the essential terms of the arrangement (such as purchase price, deposit and each party’s obligations); and
  • ensure both parties execute the Heads of Agreement correctly (ie if a company, two directors or a director and a secretary execute the agreement).

However, despite what is contained in the Heads of Agreement, in the event of a dispute, the Courts may also consider the actions of the parties and the circumstances surrounding the drafting and execution of the Heads of Agreement. The Courts can look at external factors to determine the parties’ intention and as a result may find that a party did not intend the Heads of Agreement to be legally binding, despite the above suggestions being present.

To an extent, this risk can be reduced where both parties have legal representatives advising them.

What are the pros and cons of a Heads of Agreement?

One of the most significant advantages for parties entering into a Heads of Agreement is that they do not have to negotiate every term of the transaction before entering into a Heads of Agreement. Unlike a Contract of Sale, a Heads of Agreement is more like a roadmap of the proposed transaction, with the essential terms recorded, but without needing to address all of the finer details. Accordingly, this can be a cost-effective option for parties in the early stages of a negotiation and can also offer comfort to the parties as it provides a platform for the negotiations moving forward and shows the parties are moving in the same direction.

There are also some potential disadvantages entering into a Heads of Agreement which should also be considered by the parties including:

  • whether entering into a Heads of Agreement will limit your ability to negotiate the transaction going forward (which may include reducing your bargaining position);
  • a Heads of Agreement with a binding exclusivity period, for example, will prevent a seller from being able to accept another offer during that period; and
  • the risk of liability that the Heads of Agreement will be or will not be considered binding - which may not have been the intention of one or both of the parties (as discussed above).

Finally, it is important to consider whether a Heads of Agreement is, in fact, the appropriate document for the circumstances. For example, if the parties simply want to protect the confidential nature of the arrangement – a non-disclosure/confidentiality deed could be entered into instead.

We can help!

As explained above, it is important that a Heads of Agreement is drafted clearly and unambiguously, so as to evidence your intentions in the proposed transaction. We have experience drafting Heads of Agreements in a variety of circumstances and are able to provide you with advice relevant to your specific situation. Although a Heads of Agreement may not be binding, it is still important to get it right so that your responsibilities/rights are adequately protected.

Hynes Legal provides legal advice on a range of issues relating to the sale or purchase of Retirement Villages and Aged Care Facilities. Contact us for more information.

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