Heads of terms vs letter of intent: which one you need

Heads of terms vs letter of intent at a glance

Dimension	Heads of terms	Letter of intent (LOI)
Also called	Heads of agreement, term sheet, memorandum of terms	LOI, indicative offer, term sheet
Common region	UK and Commonwealth practice	US practice
Purpose	Outline the principal terms of a proposed deal before definitive documents	Same: record the key terms the parties intend to negotiate into a contract
Typical format	Schedule or bulleted list of headline points	Narrative letter addressed to the counterparty, then signed
Binding intent	Usually non-binding on commercial terms, with binding carve-outs	Usually non-binding on commercial terms, with binding carve-outs
Provisions that usually do bind	Exclusivity or no-shop, confidentiality, costs, governing law	Same: exclusivity, confidentiality, expenses, governing law
Typical deals	M&A, joint ventures, commercial property, financing	M&A, asset or stock purchases, commercial leases, financing
Signature	Often signed or initialed by both sides	Usually signed, sometimes countersigned to accept
Key risk	Omitting “subject to contract,” accidental binding	Type I or Type II binding, good-faith negotiation duty

The key differences

They are largely the same instrument. The most important point is that heads of terms and a letter of intent are not two different legal categories. Both are preliminary documents that summarize the shape of a deal (price or valuation, structure, key conditions, timetable) so the parties can align before spending money on due diligence and definitive drafting. The differences below are real, but they are mostly about presentation and region, not legal effect.

Region and vocabulary. “Heads of terms,” along with its cousins “heads of agreement” and “term sheet,” is the common phrase in the UK and much of the Commonwealth. “Letter of intent” is the phrase US practitioners reach for, alongside “term sheet” in venture and financing deals. A US counterparty will expect an LOI; a UK counterparty will expect heads of terms. Because your market here is US, “letter of intent” or “term sheet” will read as native, while “heads of terms” may prompt a mental translation.

Format and tone. Heads of terms are often laid out as a schedule: numbered headings, short bullet points, a document that looks like a checklist of agreed positions. A letter of intent is traditionally a letter: it is addressed to the other side, written in prose, and signed at the foot, sometimes with a line for the recipient to countersign acceptance. The substance can be identical; what differs is whether the deal points sit in a list or in paragraphs.

What actually binds. This is where money is won or lost, and it is the same analysis for both documents. Under US law a preliminary document binds only to the extent the parties intended it to, judged from the language and their conduct. Courts in some jurisdictions distinguish a fully binding preliminary agreement from one that binds the parties only to negotiate the open terms in good faith. In practice, both heads of terms and LOIs are drafted to be non-binding on the commercial terms while making a short list of provisions expressly binding: exclusivity or a no-shop, confidentiality, allocation of costs, governing law, and sometimes a break fee.

“Subject to contract” and its US equivalents. UK heads of terms lean on the phrase “subject to contract” to signal that nothing binds until the definitive agreement is signed. US letters of intent reach the same result with an express non-binding clause, stating that the document creates no obligation to complete the deal and that only the identified carve-outs bind. Whichever phrasing you use, the label on the document does not protect you; the operative sentence that says what binds and what does not is what a court will read.

Which one to use, and when

Start with your counterparty and your deal. If you are negotiating with a US party, or the transaction is governed by US law, a letter of intent or a term sheet is the natural choice and will read as standard practice. If you are negotiating with a UK or Commonwealth party, or the deal sits in commercial property where heads of terms are the norm, use heads of terms so the format matches expectations. This is a choice of dialect and presentation, not of legal power, because both documents do the same job.

Then decide how you want the terms to look. Choose the schedule style of heads of terms when the deal points are discrete and you want a scannable list the negotiators can mark up line by line. Choose the letter style of an LOI when a signed, addressed document carries more weight with the recipient, for example when an acquirer wants to put an indicative offer on record. In venture financing, a term sheet (structurally a schedule, called by the US name) is the convention regardless of the label debate.

Whatever you pick, spend your effort on the binding intent, because that is the part that creates real exposure. Say in plain words that the commercial terms are non-binding and subject to a definitive agreement, then list precisely which provisions do bind: exclusivity, confidentiality, costs, and governing law are the usual set. Keep the binding carve-outs short, dated, and unambiguous, and be aware that even a “non-binding” document can create a duty to negotiate in good faith in some states.

This is where a contract lifecycle management platform earns its place. With Pactolane you can build heads of terms and letters of intent from templates and keep every draft in one repository with a full audit trail, so it is always clear which version is current and which provisions were meant to bind. PactAI adds risk scoring from 0 to 100 that flags language that binds more than you intended, conflict detection that surfaces where an LOI term contradicts the definitive contract that follows, and a conversational AI chat over a contract that lets your team ask, in plain English, whether a specific clause is binding. Compliance playbooks check that the non-binding statement and the standard carve-outs are present, exposure analysis shows where obligations concentrate, and a multilingual executive summary helps cross-border counterparties read the same terms the same way. When the deal firms up, approval workflows, renewal and deadline alerts, and eIDAS electronic signature carry the definitive agreement from draft to signature, and because Pactolane strips personal data before AI processing and hosts in Europe under GDPR and eIDAS, the review stays secure.

Decision rule: treat heads of terms and a letter of intent as the same instrument in different clothes, pick the label and format your counterparty expects (an LOI or term sheet for US deals, heads of terms for UK ones), and put your care into one sentence that states the commercial terms are non-binding and names exactly which carve-outs bind.

General legal information, not legal advice.