Why a Heads of Agreement is important in intergovernmental transactions

When a government entity transacts with another, the stakes are high. Intergovernmental transactions are often politically sensitive, highly visible, and subject to rigid timelines. Failure to clearly agree and document the key commercial terms from the outset could cause protracted negotiations, potential disputes and missed deadlines, which may then lead to political fallout.

A Heads of Agreement (HoA) is an effective tool to mitigate these risks. It is often a non-binding document that outlines the key terms and intentions of each party before entering a formal contract, setting a strong foundation for a smooth transaction or project.

Aligning commercial interests

When agencies begin transacting with another arm of government, they may assume their commercial interests align. However, differences in departmental objectives, funding cycles, governance frameworks, and risk appetite often show that each party’s commercial interests and objectives are in fact, far apart.

A HoA serves as a roadmap for the transaction, outlining the key commercial terms and each party’s responsibilities. While it generally does not bind the parties to complete the transaction, it demonstrates a mutual commitment to move forward on agreed terms. Importantly, the parties can decide which components of the HoA will be binding. 

Risks of transacting without a Heads of Agreement

Failure to clearly agree and document the agreed commercial terms of a property transaction from the outset could lead to:

• protracted negotiations – commercial terms that are critical ‘show stoppers’ may only be identified late in the process
• missed deadlines – because of protracted negotiations. This is detrimental when transactions depend on strict funding or legislative timelines
• disputes – particularly if there are differing interpretations of verbal agreements and assumed agreed commercial terms
• uncertainty – the commercial position of each transacting party may be too far apart, affecting the viability of the transaction.

Key terms to be included in a Heads of Agreement

In order to reduce the risks associated with failing to agree and document the key commercial terms of a property transaction, an HoA should include the following key commercial terms:

• parties to the agreement
• property details
• purchase price or development fee
• key dates (such as commencement/completion dates, practical completion, works milestone dates, sunset dates, if applicable)
• security to be provided by a party
• conditions precedent (for example, funding or budget approvals, ministerial, council and/or planning approvals)
• dispute resolution mechanism
• risk allocation (for example, for contamination, native title, heritage issues, if applicable)
• development contributions and obligations (such as infrastructure, public amenities – and to what standard and what certification level)
• non-binding/binding provisions – as noted above
• confidentiality/media releases.

While it may not be possible to document each of the above key commercial terms in every transaction, it is strongly recommended that the parties meet and note either in an HoA or other form of terms sheet, as many of these key terms as possible.

Takeaway

Agreeing and documenting key commercial terms is not just good practice, it is essential. A HoA (or other similar document) can prevent protracted negotiations and unnecessary delays. Even if not all the commercial terms can be set and agreed on from the outset of a transaction, documenting as many as possible is a great start to a successful transaction or project.

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Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate.

Published by:

Cameron Sheather

Annie Papageorgiou

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