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Episode 66 Transcript: Understanding the Role of Term Sheets

I wanted to take a minute in this episode to explain the concept of a term sheet or a memorandum of understanding or MOU, as it’s sometimes referred to. It comes up quite a lot in mediation processes and sometimes in more attorney-led negotiations. It’s helpful for you to understand the role of that document and at what point in the process it typically comes in.

If you recall the divorce as a three-step process, negotiating the terms is the first step. The terms of your settlement that is, and then drafting those agreements. Whatever you agree to in step one, you draft those agreements as a legally enforceable contract. That’s step two. And then in step three, typically, you’re filing everything with the court. Your contract and then usually there are a bunch of other documents the court requires you to file for their purposes to process your divorce.

There’s sort of a step 1.5 in between steps one and two, which is drafting a term sheet. I’ll call it a term sheet. Some people call it a summary of terms or memorandum of understanding. Same thing. After you and your spouse have worked through all the issues that you need to cover, before your contract is drafted, your mediator or your attorney may suggest that he or she reduce what you’ve agreed to, to a term sheet or summary of terms. Essentially, that document is just a plain language outline of what you’ve agreed to, and it’s going to cover, as relevant in your situation, the big four topics: custody, child support, spousal maintenance or alimony, and the division of your assets and debts. Then it will also typically speak to health insurance, life insurance, taxes, and how you’re covering the cost of the divorce process.

There may be other things that the term sheet addresses and that you have negotiated in phase one of your divorce process, and that will be in your ultimate contract, for instance, any commitments around future estate planning. So, if each person is committing to leave, for example, at least 50% of their estate on their death to the children of the marriage, that might be another point in your term sheet that’s addressed. But at a minimum, as relevant in your case, you’re going to see in a term sheet custody, child support, spousal maintenance, and division of assets and debts, and then health insurance, life insurance, taxes, and process costs.

So, what’s the purpose of drafting that additional document before you draft the actual contract? Why wouldn’t you just go ahead and draft the contract? Well, a couple of reasons. Number one, the term sheet tends to be three to six pages on average, and a contract might be more like 40 to 80 pages. So the term sheet is a much more manageable big picture document that allows you to not quickly read through it, but without investing hours of your time, to read through it. It’s in plain language and so easily gives you a big picture of the things that you and your spouse have agreed to and that you are ultimately asking your mediator or your attorneys to put into a legally binding contract. Basically, it gives you a chance, before the mediator or your attorneys spend all the time it takes to draft the much longer contract; it gives you a chance to say, “Yes, this is what I agreed to. Actually, here, this is slightly different,” or, “XYZ is missing. I want to add that,” or, “When I read this part, it made me think of ABC, and we didn’t touch on that, and I’d like us to” before you have the attorneys invest the time and the expense to you of drafting a very long legal contract.

Along the same lines, especially where you’re in mediation, but also when you just have an attorney-led negotiation, it’s helpful in reviewing the terms with your consulting attorney that you have reached in mediation to make sure that they’re okay with what you’ve come to or that they’ve at least understood it and weighed in on it. What you don’t want to have happen is to have your mediator draft a long contract, some of the fundamental terms of which your consulting attorney just learns of as they’re reading that contract and has key critical concerns about that they then share with you and you then have concerns about.

In that scenario, it’s a bummer for you and for your spouse because you’ve already paid your mediator to draft the long contract and then you’re proposing potentially fundamental changes to it. So it can end up costing you a lot more money and time and headache. Exactly the concept of, “A stitch in time saves nine,” but basically it’s much easier to (a) understand and (b) change and update, amend, edit a term sheet than it is a very long contract. So, you want to understand the terms first. You want to impose and make any changes to them in that term sheet form, in that shortened form, and then you want to draft the contract when you know that you have a mutual understanding of and agreement on all the terms.

I’ll just say that listen, people’s practices differ here, so there are many mediators and many attorneys, perhaps a majority, who will prefer to just draft the contract and then go through the review and edit process around the contract. The thinking there is that, listen, at the end of the day, the only language that matters is the language of the contract. And that is true. What you say in your term sheet is not legally binding, has no legal significance. So, you don’t want to go too far down a rabbit hole with the term sheet of tweaking every word because it’s not ultimately legally enforceable and it doesn’t matter. You don’t want to spend too much time or resources there.

So, I think the thinking in, “Just forget the term sheet. Let’s draft the contract,” the thinking is, “Look, all that matters is the contract, and then we can just review and negotiate changes to the contract. Let’s just cut to the chase,” whereas the approach of drafting a term sheet or an MOU first is, before we expand the attorney hours and client’s money to draft a long contract, let’s (a) make sure we’re on the same page just between the parties, and (b) let’s make sure that outside reviewing attorneys, if you’re in a mediation, understand the terms that their clients are agreeing to and have weighed in on those. Even if it’s to say, “I don’t agree with this,” and then for you or your spouse to say, “I understand that, but I’m going to proceed with it anyway,” that’s fine. What you don’t want is fundamental feedback coming as a surprise after the contract has been drafted. That’s never great.

Suffice to say that it is not wrong if you’re working with an attorney or with a mediator who goes straight from informal negotiation and thinking that you’ve come to terms to just drafting a contract. That’s really pretty common. But if you’re working with a practitioner whose practice it is to draft a term sheet or summary of terms before drafting a contract, that is also a common way of practicing and can be very helpful in getting you, and your spouse and your outside attorneys on the same page before that longer contract is drafted.

So, that was our episode on term sheets. I hope it was helpful for you.

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