Heads of terms (also called a heads of agreement or letter of intent) is the document that records what the buyer and seller have agreed in principle before legal documentation begins. In an estate or letting agency sale, the heads of terms document is non-binding on the commercial points — but it shapes every subsequent negotiation. What you agree at heads of terms stage is almost always what you end up with at completion.
Most sellers underestimate the importance of getting heads of terms right. The assumption is that the detailed legal work happens later, so the heads of terms can be approximate. The opposite is true. By the time the Sale and Purchase Agreement is in draft, both sides have instructed solicitors, incurred significant costs, and created psychological commitment to the deal. Renegotiating a point that was agreed at heads of terms — or asserting that you never agreed to it — is difficult, damaging, and sometimes fatal to a transaction.
This guide explains what should be in heads of terms for an estate or letting agency sale, and what mistakes to avoid.
What Heads of Terms Covers
1. Consideration structure. The total consideration and how it breaks down: upfront cash, earn-out, and any vendor loan. The heads of terms should specify not just the headline figure but the structure — how much is payable on completion, what the earn-out is linked to (AMFI or revenue), what the earn-out measurement period is, and whether a vendor loan is included. A heads of terms that records “total consideration £X” without distinguishing the upfront and deferred elements is incomplete. For a detailed explanation of how earn-out mechanics work in agency sales, see our guide to estate agency earn-out mechanics.
2. AMFI definition. The earn-out in most lettings agency sales is AMFI-based. The heads of terms should specify (or at minimum frame) how AMFI is defined. This matters because AMFI can be measured in different ways — which management fees are included, whether sales commissions are excluded, how lettings fees from properties under notice are treated. A vague AMFI definition at heads of terms stage becomes a protracted negotiation in the SPA.
3. Exclusivity and timing. The exclusivity period (during which the seller agrees not to approach or negotiate with other buyers) and the target completion date. An exclusivity period of four to eight weeks is standard for straightforward transactions; more complex deals may require longer. Ensure the exclusivity period is sufficient for the buyer to complete due diligence and for solicitors to negotiate the SPA — but not so open-ended that momentum is lost.
4. Conditions precedent. Any conditions that must be satisfied before the transaction can complete. For letting agency sales, typical conditions precedent include: satisfactory financial due diligence; management agreement review. Note that management agreement assignment — the process by which the portfolio transfers from seller to buyer — is usually a completion mechanic rather than a condition precedent, unless a significant number of agreements require landlord consent.
5. Employee obligations. Confirmation that TUPE applies (it will, in a business sale) and the expected approach to information and consultation. The heads of terms should note that the buyer will receive employee liability information at least 28 days before completion. Where there are planned post-completion changes to staff arrangements, those should be flagged at heads of terms stage.
6. Non-compete and non-solicitation. The scope, duration, and geographic reach of the seller’s post-completion restrictions. In a letting agency sale, these provisions are commercially significant: the seller typically knows the entire landlord portfolio by name and has personal relationships with them. A non-solicitation covenant preventing the seller from approaching former landlords for two to three years is standard. A non-compete preventing the seller from operating a competing lettings agency within a defined area is also standard.
Both scope and duration are negotiating points. Wider restrictions protect the buyer (and justify a higher multiple); narrower restrictions protect the seller’s future commercial freedom. This balance should be negotiated at heads of terms, not in the SPA.
7. Transition arrangements. Whether the seller will provide transition support, for how long, and how it will be paid. Most letting agency sales involve an operational handover period — the seller helps the buyer understand the portfolio, makes introductions to key landlords, and supports the bedding-in process. Define the expected duration and terms at heads of terms stage.
8. Confidentiality. Whether the transaction is confidential, and any obligations on the buyer regarding disclosure during the due diligence process.
The AMFI Definition: Why It Cannot Be Left Vague
The AMFI definition is the single most consequential provision in a heads of terms for a lettings agency sale. It determines what the earn-out is worth and forms the basis for every dispute about earn-out shortfalls.
At minimum, the heads of terms should record:
- Which fees are included (management fees on managed properties — yes; sales fees — generally not; tenant fees — depends)
- Whether fees from properties under notice are excluded, and from what date
- How AMFI is measured (trailing twelve months, annualised monthly run-rate, or specific year-end calculation)
- What the minimum and maximum earn-out payment is (floor and cap, if any)
A heads of terms that simply says “deferred consideration of £X linked to AMFI performance over 24 months” is commercially incomplete. Both buyer and seller will have different assumptions about what AMFI means until it is defined. The SPA negotiation will surface those differences — but by then, both sides have invested heavily in the deal and the pressure to compromise falls on the seller.
Specialist solicitors with agency sale experience will raise the AMFI definition at the first SPA markup. Instruct your solicitor before heads of terms are signed so they can sense-check the definition before it is locked in.
Common Heads of Terms Mistakes
Agreeing in principle to an earn-out without defining AMFI. This is the most frequent mistake in lettings agency sales at heads of terms stage. Both parties leave the meeting thinking they agreed on an earn-out, but the AMFI definition is entirely different in the buyer’s model versus the seller’s. The gap only surfaces in the SPA negotiation.
Not specifying the earn-out measurement period. An earn-out measured over twelve months gives the buyer less room to manage the portfolio down; an earn-out measured over thirty-six months gives the buyer three years to do so. The measurement period length is a substantive negotiating point, not a drafting detail.
Accepting a non-compete that is broader than you need. Non-compete provisions agreed at heads of terms are rarely narrowed in the SPA. If you accept “no competing lettings activity within the county for three years” at heads of terms, that is almost certainly what you will sign.
Not agreeing a transition payment. Sellers who agree to “provide reasonable transition support” without specifying payment often find themselves providing substantially more support than they anticipated for no additional consideration. If the transition period is a commercial obligation, it should have a commercial value attached at heads of terms.
Signing exclusivity before legal review. Heads of terms are non-binding on commercial points, but the exclusivity clause is typically binding. Once you are in exclusivity, your ability to generate competitive pressure disappears. Ensure your solicitor has reviewed the heads of terms before you sign.
When to Instruct a Solicitor
The short answer is: before heads of terms are signed.
Your solicitor should review the draft heads of terms before it is executed. A specialist agency solicitor will check the AMFI definition, the earn-out structure, the non-compete scope, the exclusivity period, and the TUPE obligations for completeness and commercial sense. Fees for a heads of terms review are minimal relative to the cost of a poorly constructed earn-out or an overbroad non-compete.
For a full account of how a specialist solicitor supports the sale process from heads of terms through completion, see the role of a solicitor when selling an estate or letting agency. For a complete overview of the sale process from valuation to completion, see how to sell your estate or letting agency.
Buyers and sellers who treat heads of terms as a formality — to be agreed over a handshake and refined in the legal process — consistently end up with less favourable outcomes than those who treat it as the substantive commercial negotiation it is.
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Frequently Asked Questions
Are heads of terms legally binding in an estate agency sale?
Most provisions of heads of terms are expressly non-binding — they record commercial intentions but do not create enforceable obligations until the Sale and Purchase Agreement is signed. The binding exceptions are typically exclusivity (the seller cannot approach other buyers during the defined period) and confidentiality. All commercial terms — price, AMFI definition, earn-out structure, non-compete scope — become binding only when the formal legal agreement is signed.
What is AMFI and why must it be defined in heads of terms?
Adjusted Management Fee Income (AMFI) is the standard earn-out metric in estate and letting agency transactions. Its definition varies between buyers and businesses — which fee streams are included, whether it is measured gross or net, how fees from properties under notice are treated, and whether a floor or cap applies. If heads of terms agree an earn-out “based on AMFI” without defining the metric, it becomes the most contentious issue in the subsequent SPA negotiation.
Does TUPE apply in an estate or letting agency sale?
Yes, in a business (asset) sale, TUPE will almost always apply. Existing staff transfer to the buyer on their current terms and conditions. The seller must provide employee liability information to the buyer at least 28 days before completion, and the buyer cannot change transferred employees’ terms without following the TUPE consultation process. These obligations should be addressed in the heads of terms.
How long should a non-compete restriction last in an agency sale?
Non-compete restrictions in estate and letting agency sales are typically two to three years. The restriction must be proportionate to the goodwill being transferred — courts will enforce restrictions that protect the buyer’s legitimate interest in the business purchased, but not those wider than reasonably necessary. Geographic scope, duration, and the specific activities restricted should all be negotiated at heads of terms stage, before the SPA is drafted.