Term Sheets, Made Simple
By Jane Shaw, Legal Project Officer
What is a Term Sheet?
A term sheet outlines the main terms and conditions of an agreement between parties. It is non-binding and is usually written in relation to a proposed transaction, such as prior to the writing of a binding contract. It can be used in different transactions, including:
- Sale of business
- Transfer of shares
- Setting up an investment
- Lease agreements
What is usually found in a term sheet?
While there are many standard term sheet templates that can be used for simple transactions, it is important to seek legal advice when writing a term sheet, as you will need to define key words specific to the type of activity you are involved in. For instance, an Offer of Lease agreement will include terms such as:
- The parties’ details;
- A description of the premises;
- Base rent payable; and/or
- Any included or excluded fixtures and fittings.
Is a term sheet legally binding?
Unlike a contract, the term sheet aims to define or specify terms that need to be considered by everyone involved in the transaction, and it is not necessarily written to be enforceable in court or another legal process. It is similar in function to a Memorandum of Understanding or Heads of Agreement – the main difference between a term sheet and these documents is their form and structure.
However, a term sheet may still be legally binding if it is drafted in a sufficiently detailed manner or outlines all terms that will eventually be written into a formal legal document. It is important to speak to a lawyer about what you’d like to include in your term sheet and discuss what its effect will be.
Why use a term sheet?
The term sheet is a versatile document, as it can be used for virtually any type of contractual negotiation.
For many transactions, essential commercial terms relevant to the type of business, operations and activity need to be defined. The term sheet becomes an important piece of document, as it provides a guide for preliminary negotiations between parties, and clearly defines all matters that need to be properly considered and decided upon. Main points that are agreed to by parties involved with a transaction can also be outlined in the term sheet. Once negotiations end, these points can be expanded upon and written as terms within a legally binding contract.
The term sheet can assist not only in preliminary negotiations, but also serve as a guide in the final stages of a deal. It allows lawyers to draft a contract that contains all aspects of the transaction, based on negotiations that have been grounded by a term sheet.
The term sheet can also boost investor confidence. It is a document that can serve as a formal indicator of intentions to move ahead with negotiations. Therefore, drafting and showing a term sheet during preliminary investment negotiations indicate a serious intention by parties to foster their relationship moving forward.