How Not to Write a Term Sheet

I’m often given a signed term sheet or letter of intent for a new transaction and asked to work on the full agreement.  More often than not, I have numerous questions about the term sheet before I can get started.  A poorly written term sheet can create confusion and delay.  A well written term sheet gives me and the entire team clear direction on how to address critical issues in the full agreement and expedites completion of the transaction.  So it’s important to get it right.  Here are some pointers on drafting and negotiating a term sheet:

Don’t Be Vague or Ambiguous.  Be clear in your writing and say what you mean. Don’t mix up terms that can have very different meanings, such as lease date, lease commencement date and rent commencement date.  Indicate which party is responsible for stated obligations, like services, and which party has control and authority over decisions, like design choices.  Make it clear who pays for what, how fees are calculated and when they are paid.  Be careful in your use of industry terms such as “net revenues,” “profits,” or “NOI,” or “shell”, “white box”, or “vanilla box”.  Don’t assume that you and your counterparty agree on the meaning of these terms.
Don’t Be Confusing. Here’s a common example of confusing language: “Tenant will have a five year option to extend the term subject to Landlord’s approval.” If an option is subject to another party’s approval, it’s not an option at all. And if the term is in fact extended, it’s all too common that the term sheet is silent as to the fees or rent payable during that period. See next point below.

Don’t Miss Essential Business Points. Think through all the critical aspects of your deal. For example, rather than merely stating that a certain party is responsible for development, consider whether to address the financial exposure of that party – is the entire construction project at its sole cost or is there a mechanism to address budget overruns? Does the other party have input or approval? Consider addressing timing issues such as deadlines to deliver certain work or services or to open for business. In other words, try to anticipate and address the issues that flow from the basic deal points.

Don’t Create a Binding Contract by Mistake. Include language that your term sheet is not binding on the parties unless and until they enter into a written agreement, and that negotiations may be terminated at any time. Otherwise, your term sheet, or even your exchange of emails attaching your term sheet, may create a binding contract without the protection of a full agreement.

But Don’t Forget that Certain Points Should be Binding. If you want to keep the term sheet confidential, or exclusively negotiate the full agreement for some limited time, these provisions of the term sheet should be binding even though the obligation to enter into a full agreement is not.

Don’t Overstep Your Expertise. Don’t attempt to address legal issues such as indemnities, defaults, remedies and the like unless you first obtain the input of your lawyer. If you don’t fully understand a concept, don’t attempt to include it in your term sheet without guidance.

Don’t Dupe off Another Deal. Start each term sheet you draft from scratch. Or better yet, create a form and always start from the form. And use your form as a guide when reviewing a term sheet drafted by your counterparty. If you start a new term sheet from a prior deal’s term sheet, you may miss points you would have wanted to include or inadvertently include specifically negotiated deal points that may not apply.

Don’t Defer the Essentials. Apart from the main business points, it can be hard to decide what to include in a term sheet. On the one hand, you may decide to defer certain issues until you have started negotiating the full agreement, and everyone is more invested in the deal. But that works both ways. Keep in mind that you may lose leverage on a point that’s important to you if you don’t address it up front, when it’s easier to walk away. For example, if you know you won’t sign a full agreement without non-disturbance protection, or a right to terminate without cause, raise it in the term sheet – you can create ill will by raising a material issue after the term sheet is signed.

Don’t Forget Your Last Deal. If you recently experienced a difficult negotiation on an important point that wasn’t addressed in the term sheet, perhaps because you didn’t regard it a business issue (e.g., ownership of intellectual property), consider including it in your term sheets going forward. Or if your operational team is experiencing certain challenges with your counterparties after deals are signed (e.g., standards of operations, role of certain key principals, etc.), consider addressing the relevant points in your term sheets as well. This will flesh out problems early on.

Don’t Ignore Your Lawyer: Consider spending a penny today to save a pound tomorrow.

For more information about what we might be able to do for you on your next transaction, please contact our offices directly.

All Best,

Robin Zeidel