The process of buying or selling a rent roll includes quite a few steps and can take several months. The more preparation you do in the early stages with the help of your broker and accountant, the better.
One of the recommended first steps involves figuring out what you need to agree on and which clauses will be included in the final exchange contract. This phase requires the preparation of one of three documents: a non-binding Heads of Agreement (HoA), a binding HoA or a Term Sheet. Each can serve as a foundation for the contract of sale and guide legal teams in drafting the final agreement, but there are differences to be aware of.
Non-binding Heads of Agreement
A non-binding Heads of Agreement (HoA) is commonly used before the formal contract stage of a rent roll transaction. This document outlines the key terms both parties have agreed to in principle, such as the purchase price, payment terms, confidentiality and due diligence requirements. However, as the name suggests, it is not legally enforceable.
Why choose a non-binding HoA?
Flexibility – A non-binding HoA includes the main elements of the final contract, but either party can walk away without legal consequences. This allows for adjustments before committing to a final contract.
Efficiency – Lawyers can reference a non-binding HoA when they draft the final contract, which reduces back-and-forth negotiations.
Good faith negotiations – While not legally binding, having a non-binding HoA signals serious intent and helps structure discussions.
BDH Solutions has traditionally used non-binding HoAs when supporting clients with rent roll exchanges because they allow both parties to agree on broader terms without being prematurely locked into a contract.
Read more: Three things you need to know before buying a rent roll
Binding Heads of Agreement
A binding HoA is similar in structure to a non-binding HoA but includes legally enforceable commitments. Essentially, it becomes a contract in itself, which can complicate the transaction process.
Implications of a binding HoA:
Less flexibility – Once signed, both parties are legally committed to the agreed terms, making later renegotiation difficult.
Potential for disputes – If one party wishes to change terms, they may be in breach of the agreement.
Overlap with the final contract – Since the HoA is binding, some lawyers argue it defeats the purpose of having a separate contract of sale.
For rent roll sales, we see the use of a binding HoA as risky because it removes the ability to refine terms during the due diligence phase. If changes are needed because previously undiscovered issues arise, renegotiation can be time-consuming.
If you are looking to buy or sell a rent roll and wish to include a Heads of Agreement, it is important to be clear on whether or not it is legally binding before you start this part of the process.
Term Sheet
A Term Sheet is a more structured but still flexible way of setting out the key terms of a rent roll exchange. Unlike a Heads of Agreement, this document is usually a brief, bullet-point list focusing only on the essential commercial terms. It does not attempt to define the full details of the transaction.
A term sheet includes:
Clearer structure – Providing a concise summary of the key commercial terms.
More flexibility than a binding HoA – While it sets expectations, it does not typically create legal obligations.
A reference for contract drafting – Lawyers can use it as a reference point, streamlining the legal process.
At BDH Solutions, we offer Term Sheets as an option for clients who want a streamlined term sheet instead of a detailed Heads of Agreement.
HoA or Term Sheet: Which option is best for a rent roll agreement?
The choice between a non-binding HoA, a binding HoA and a Term Sheet depends on how much flexibility both parties want before entering a formal contract.
For maximum flexibility – A non-binding HoA is ideal, allowing parties to agree on key terms without legal commitment.
For structured but non-binding negotiations – A Term Sheet provides clarity without unnecessary legal constraints.
For legally enforceable commitments – A binding HoA is an option, though it can complicate the transaction process, and we generally do not recommend this approach.
In rent roll transactions, using a binding HoA can sometimes defeat the purpose of early negotiations, as it creates enforceable obligations before due diligence is complete. In contrast, a non-binding HoA or a term sheet allows you and your buyer or seller to outline intentions and key elements of the final agreement without prematurely locking in terms.
When you’re buying or selling a rent roll, choosing the right initial agreement can facilitate a smoother, less stressful transaction. The BDH Solutions team is happy to walk you through the differences and ensure you are confident with the style of agreement applied to your transaction.