Heads of Agreement for a Queensland Business Sale: What Goes In and What Waits

Key Takeaways

• A heads of agreement has to settle three things in plain words: whether it binds, which clauses bind and what happens to the deposit, the costs and the information exchanged if the deal does not proceed.
• Private deals commonly split the document: price, structure and conditions are expressly non-binding, while exclusivity, confidentiality and costs bind, with each clause labelled one way or the other.
• Exclusivity for a fixed period is enforceable in principle, but the remedy for breach is damages, in practice the buyer's wasted costs rather than an order that the sale go ahead, so the clause should fix its own consequence.
• A forfeitable deposit is treated as an earnest rather than a penalty only while it is reasonable in amount; in land sales the courts treat the customary 10 per cent as the benchmark and have struck down top-up clauses and larger sums, and business sales have no settled figure.
• Under the Duties Act 2001 (Qld) a binding agreement to transfer Queensland business assets is itself dutiable, conditional or not, and lodgement is due within 30 days. A heads of agreement that does not itself bind anyone to transfer anything is not that agreement, and duty waits for the contract.

1. 1.Is a heads of agreement binding?
2. 2.What belongs in the heads and what should wait for the contract?
3. 3.How does exclusivity work and what happens if it is broken?
4. 4.When is a deposit an earnest and when is it a penalty?
5. 5.Should a heads of agreement include a break fee?
6. 6.Can a heads of agreement attract transfer duty in Queensland?
7. 7.What happens after the heads are signed?
8. 8.What turns on your own deal
9. 9.Frequently Asked Questions

A heads of agreement (heads), also called a term sheet or letter of intent, records the price and shape of a business sale, and it has to settle three things: whether it binds, which parts bind and what happens to the deposit, the costs and the information exchanged if the deal falls over. In Queensland the first question also carries a tax consequence, because a binding agreement to transfer business assets can itself attract duty under the Duties Act 2001 (Qld), so Astris Law in Brisbane reads the binding clause of a draft first.

Is a heads of agreement binding?

It binds if, read objectively, the parties intended it to. The categories from Masters v Cameron (1954) 91 CLR 353 are explained in our article on when negotiations become binding. In Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622, affirmed on appeal at 631, letters for the sale of a private hospital that called the arrangement legally binding while providing for a formal contract to follow were held to bind at once. The usual private-deal answer is a split document: commercial terms expressly non-binding, process terms expressly binding, each clause labelled.

What belongs in the heads and what should wait for the contract?

Warranties, the restraint, employee terms, price adjustments, the condition clauses themselves and the terms of forfeiture wait for the contract. Confidentiality needs care, because diligence hands over staff information, and the Office of the Australian Information Commissioner's guidance on selling a business asks for de-identified employee information where possible and for personal information to be returned or destroyed when diligence ends.

How does exclusivity work and what happens if it is broken?

Exclusivity is the buyer's return for the cost of diligence, and for a fixed period the seller agrees not to solicit, negotiate with or give information to anyone else. Such a lock-out is enforceable in principle where it has a definite end date, consideration and clear terms, as the House of Lords accepted in the English case Walford v Miles [1992] 2 AC 128, where the clause failed for want of a fixed period. The remedy for breach is damages, in practice the buyer's wasted costs, because the value of the lost deal depends on proving what would have followed, which a buyer at the heads stage rarely can, and specific performance is not available where no contract of sale has been made. The clause should therefore fix its own consequence, usually a costs reimbursement. A period measured in weeks rather than months is the usual starting point, and how long to grant turns on how much diligence the buyer has to do and how much the seller gives up by waiting.

When is a deposit an earnest and when is it a penalty?

A deposit paid on the heads is forfeited only under a binding bargain the buyer then breaks, whether that bargain is the heads of agreement or the later contract; under a non-binding heads of agreement the money stays the buyer's and comes back if no contract follows, as in Masters v Cameron. Where a deposit is forfeitable the law on penalties limits its size: in Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573 the Privy Council accepted the customary 10 per cent as the benchmark and held that a vendor taking more must show special circumstances or repay the whole deposit less any proved loss; Australian courts apply the same rule, striking down a clause that topped a smaller deposit up to 10 per cent on default in Luu v Sovereign Developments Pty Ltd [2006] NSWCA 40. Both are land cases. Business sales have no fixed percentage, and the deposit usually sits in the broker's trust account or with a solicitor. The defensible figure turns on what the seller actually stands to lose, and it should be settled before a number goes into the heads.

Should a heads of agreement include a break fee?

A break fee is a sum one party pays the other if the deal does not proceed for a stated reason. Private sales have less need of them, because exclusivity and conditions handle the same risks, and after Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 and Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525 a fee stands unless it is out of all proportion to the interests it protects, however its trigger is framed. A costs reimbursement tied to a breach of exclusivity usually covers the same ground with less to argue about.

Can a heads of agreement attract transfer duty in Queensland?

It can, because under s 9(1)(b) of the Duties Act 2001 (Qld) a dutiable transaction includes an agreement for the transfer of dutiable property, whether conditional or not. Under s 10(1)(d) dutiable property includes a Queensland business asset, which the Queensland Revenue Office (QRO) lists as including goodwill, business names, franchise rights, intellectual property, plant and stock, subject to the exclusions in s 37. Liability arises when the agreement is made and s 19(3) requires the parties to lodge it within 30 days; QRO's Public Ruling DA019.1.5 records that a party who fails to lodge commits an offence and may be liable to unpaid tax interest and penalty tax, and that the Commissioner can extend the time for a conditional agreement. So a heads of agreement that itself binds the parties to transfer business assets is the dutiable agreement and the 30 days run from the day it is made, while one that binds neither side to transfer anything is not, and duty waits for the contract. Which suits you depends on whether you are buying or selling, and two parties to one deal can need opposite advice on it.

What happens after the heads are signed?

Diligence and contract drafting usually run in parallel; in the firm's experience that takes three to six weeks for a small business. The contract then picks up the conditions the heads named and settles what the heads left open, and completion waits for any landlord, licensing or financier consent.

What turns on your own deal

What a particular heads of agreement should say turns on whether the sale is of assets or shares, whether the seller wants a binding commitment before the books are opened, how much money moves on signing and whose consent stands between the parties and completion. Those are questions about your deal rather than about heads of agreement in general, and they need advice on the documents. If a draft heads of agreement is in front of you, call Jamie Nuich on (07) 3519 5616 before it is signed and work through what it should and should not bind; the firm's business sales and acquisitions page describes the wider work.

Frequently Asked Questions

Is a heads of agreement legally binding in Australia?

Only if, read objectively, the parties intended it to be. A heads of agreement for a private business sale commonly binds in part: exclusivity, confidentiality and costs bind while the commercial terms do not.

Does transfer duty apply to a heads of agreement in Queensland?

Yes, where the heads are themselves a binding agreement to transfer Queensland business assets, because liability arises when the agreement is made and lodgement is due within 30 days. A non-binding heads of agreement is not that agreement.

How long should an exclusivity period be?

A period measured in weeks rather than months is the usual starting point. How long to grant turns on how much diligence the buyer has to do and how much the seller gives up by waiting, and the clause should carry a fixed end date and state what happens if it is broken.

How large should the deposit on a heads of agreement be?

Business sales have no fixed percentage. In land sales the courts treat the customary 10 per cent as the benchmark for a forfeitable deposit and have struck down larger sums and top-up clauses as penalties, so the figure should reflect what the seller actually stands to lose and be settled before a number goes into the heads.

This article is for general information purposes only and does not constitute legal advice and should not be relied on as such. While we take reasonable care to ensure the accuracy of the information provided, we make no representations or warranties as to its completeness, currency or reliability. We accept no liability for any loss or damage arising directly or indirectly from the use of, or reliance on, this website's content. You should always seek professional advice tailored to your specific circumstances before acting on any information in this article. Liability limited by a scheme approved under Professional Standards Legislation.

Astris Law is not a registered tax agent and does not provide tax advice. References to tax law in this article describe the legal framework only. For tax advice specific to your circumstances, consult your registered tax agent or accountant.