Term sheets: introduction, Practical Law UK Practice Note 9-201-9296
Term sheets: introduction
by Practical Law Finance
Practice notes | Maintained | England, Wales
An introduction to term sheets in the context of lending transactions, including details of what they include and
when they are used. This note also considers the lender's and borrower's perspectives when drafting and negotiating
term sheets.
This note includes links to related resources such as standard form term sheets and commitment letters.
What is a term sheet?
Legally binding and non-legally binding terms
Jurisdictional issues
How can a term sheet be used?
What does a term sheet cover?
Lender's or arranger's perspective on preparing a term sheet
Borrower's perspective
Forms of term sheet
What is a term sheet?
A term sheet (also known as heads of terms) is a document that provides an overview of the key commercial and other terms
of a transaction. In the context of a lending transaction, it sets out the terms on which a lender or group of lenders is willing to
lend to a borrower and is used as a basis for drafting a facility agreement. It may be attached as an appendix to a commitment
letter (which is also called a mandate letter).
The lender or arranger(s) usually prepares a term sheet on the basis of initial discussions with the borrower. However, the term
sheet will usually be negotiated by the borrower. If the facilities are to be syndicated a commitment letter will also usually be
drafted by the arranger(s). Once the term sheet (and, if relevant, the commitment letter) has been agreed, the borrower will have
a certain period of time within which to accept the terms and grant a mandate to the lender or arranger(s).
Occasionally, the term sheet will be prepared by the borrower rather than the lender or arranger(s).
Legally binding and non-legally binding terms
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Term sheets: introduction, Practical Law UK Practice Note 9-201-9296
A term sheet is normally largely non-legally binding. Occasionally, parties sign a legally binding term sheet, usually in
connection with a debt commitment letter. This commits the lender or group of lenders to provide the loan or other facilities
before the finance documents are in agreed form. This is most likely to occur in an acquisition financing.
In relation to a typical non-legally binding term sheet, there are two exceptions that create legally binding obligations between
the parties:
• As a borrower will normally want a binding undertaking in its favour in respect of confidential information that it
provides to the lender during the course of negotiations, such an undertaking will typically be included in the term sheet
(if a separate confidentiality undertaking (or confidentiality agreement) has not already been provided). For an example
of a separate confidentiality agreement to be used in connection with a lending transaction, see Standard document,
Confidentiality agreement: lending.
• A lender or arranger(s) will often insist that the term sheet contains a binding undertaking on the part of the borrower
to pay its or their costs and expenses (including legal fees) incurred in connection with preparing, negotiating, printing,
executing and (if the facilities are syndicated) syndicating the loan or other facilities, whether or not the facility
agreement is signed. This is often referred to as a "drop-dead" fee.
Where certain terms in a term sheet are intended to be binding, the legal requirements for creating a valid contract must be
satisfied in respect of those terms. For more information, see Practice note, Heads of terms in commercial transactions: Are
my heads of terms legally binding?.
Care should be taken that the parties' intention to create (or not create) a contractual or legally binding relationship is reflected
in the documents and any correspondence. Expressing matters as being "subject to contract" may not always be sufficient to
prevent a contract being created inadvertently. For more information, see Practice notes, Contracts: formation: Intention to
create legal relations and Heads of terms in commercial transactions: "Subject to contract".
Jurisdictional issues
"Subject to contract" wording (see Legally binding and non-legally binding terms) is not recognised in many jurisdictions, and
so it should never be relied on without further detail when dealing with non-English parties. Some jurisdictions also impose a
duty to negotiate in good faith (see Practice note, Heads of terms in commercial transactions: European position and duty to
negotiate in good faith). Entering into a term sheet may help to crystallise that duty.
How can a term sheet be used?
In addition to setting out the basic terms of the transaction agreed between the lender and the borrower, the term sheet will
be used:
• By a lender to obtain its internal authorisation (credit committee approval) for the proposed facilities.
• To help the lender's (or facility agent's) solicitors to draft the facility agreement and related finance documents.
• To help the borrower's solicitors in their review the first draft of the facility agreement and related finance documents.
• To alert the borrower to the main conditions precedent that will be required to be satisfied before the facilities are made
available. This gives the borrower more time to satisfy these requirements.
• If the facilities are syndicated, by the proposed syndicate to assess whether to join the transaction.
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Term sheets: introduction, Practical Law UK Practice Note 9-201-9296
For background information on reasons for and against using heads of terms in commercial transactions, see Practice note,
Heads of terms in commercial transactions: Reasons for and against using heads of terms.
What does a term sheet cover?
Generally, a term sheet is widely drafted and includes provisions dealing with:
• The parties (lender(s), arranger(s), facility agent, security trustee, hedging counterparty and obligors).
• Type and amount of the facilities (including any tranching).
• Purpose of the facilities.
• Term, availability period and repayment dates and instalments.
• Pricing (interest, fees and whether hedging is required).
• Prepayment and cancellation.
• Representations and warranties.
• Covenants (information, general and financial).
• Events of default.
• Majority lenders (syndicated facilities only).
• Assignments and transfers by lenders (particularly if the facilities are to be syndicated).
• Conditions precedent (including security documents, if required).
• Miscellaneous provisions (for example, tax gross-up).
• Costs and expenses.
• Confidentiality (if this has not been dealt with separately).
• Governing law and jurisdiction.
Lender's or arranger's perspective on preparing a term sheet
Depending on market conditions and on the particular borrower, the lender or arranger may be in a stronger position than the
borrower to negotiate the terms of proposed facilities and to include provisions favourable to it in the term sheet.
A lender or arranger will also wish to prepare the term sheet so that it is sufficiently detailed:
• For it to obtain credit committee approval.
• To make it difficult for the borrower to negotiate terms that fall outside that credit committee approval.
The term sheet usually includes a statement that its terms are indicative only and do not constitute an offer to finance (or
arrange or both) the facilities. This gives a lender or arranger scope to depart from the term sheet during any later negotiations,
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Term sheets: introduction, Practical Law UK Practice Note 9-201-9296
and should mean that it is not obliged to provide or arrange the facilities even if the borrower agrees the term sheet. This is
particularly important if the lender or arranger has not yet obtained credit committee approval.
The term sheet also usually states that provision of the facilities is subject to due diligence in relation to the borrower, credit
committee approval (if that has not yet been obtained), the terms and conditions of the commitment letter, and satisfactory
documents being entered into. The requirement that documents are satisfactory to the lender or arranger(s) (as appropriate) also
gives it scope to depart from the term sheet during later negotiations.
It will be in the lender's or arranger's interests to keep the term sheet as flexible as possible. For example, it may specify "events
of default shall apply including, but not limited to, the following". This gives it maximum flexibility. The longer and more
detailed a term sheet, the harder it is in practice for the lender or arranger to deviate from its terms. The detailed terms will have
been negotiated between the parties and the borrower will resist any further changes.
A lender or arranger may not wish to include the details of its fees in the term sheet. This may be for reasons of commercial
sensitivity (particularly if the facilities are to be syndicated) or because it prefers to finalise the details of its fee arrangements
during the negotiation of the finance documents and the completion of any due diligence. It is important to ensure that any
formula used for calculating fees is correctly drafted. Lenders (and other finance parties) should be careful when providing any
fee estimates in term sheets and using formulae for calculating fees. In ING Bank NV v Ros Roca SA [2011] EWCA Civ 353, the
Court of Appeal ruled that a bank, having provided an estimate of fees calculated on one basis, was estopped from relying on
the fees clause in a contract to avoid calculating its fees on a revised basis. For more information, see Legal update, Estoppel
forces bank to charge fees in line with their estimate rather than with the contract (Court of Appeal).
Borrower's perspective
The term sheet will be the first clear written indication to the borrower of the basic terms proposed, and the borrower will use it to
decide whether to accept that lender's or arranger's terms or to approach a different lender. Generally, the borrower's negotiating
position is much better at this very early stage of its dealings with potential lenders and it is more likely to obtain key concessions
before signing or otherwise agreeing the term sheet. The borrower should consider all the provisions of the term sheet, and
should be wary of any generic language (such as "The borrower shall provide the usual representations and warranties.").
Forms of term sheet
The Loan Market Association (LMA) has produced, among others, a term sheet for a syndicated multi-currency term and/or
revolving facilities agreement, which its members can access from the LMA website. For more information about the LMA's
mandate and syndication documents for primary documents, see Practice note, Loan Market Association: Primary documents:
mandate and syndication documents.
See also Standard documents:
• Term sheet: bilateral.
• Term sheet: bilateral acquisition finance facilities.
• Term sheet: syndicated.
• Term sheet: syndicated acquisition finance facilities.
• Term sheet: syndicated term loan, pre-export finance facility.
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Term sheets: introduction, Practical Law UK Practice Note 9-201-9296
For standard form commitment letters and related resources, see Practice note, A guide to key resources: general lending:
Commitment letters.
END OF DOCUMENT
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