Is a term sheet legally binding?

Usually not as to the loan itself. A lender's term sheet is commonly marked indicative or subject to credit approval and documentation, which keeps both sides free to withdraw. Particular paragraphs, such as costs, confidentiality or exclusivity, may be drafted to bind on signature. The label is not conclusive, because courts look at the words and at what the parties did afterwards, so a borrower or lender who starts performing as though a deal is done can create an argument that one exists.

Can a bank change the terms after issuing a term sheet?

Yes, while the term sheet remains indicative. Credit may approve a different structure, a valuation may come in lower, or due diligence may show something the first conversation did not. Banks generally try to avoid moving on points they have written down, because a changed offer damages the relationship. Once a facility letter has been issued after approval and accepted, a change needs the agreement the contract requires, unless the contract itself gives the bank a right to vary.

Do you pay anything if you sign a term sheet and walk away?

That depends on the costs paragraph. Many term sheets make the borrower responsible for the lender's legal and valuation costs whether or not the loan goes ahead, sometimes up to a stated cap. An establishment fee is more often payable on first drawing, though some lenders take part of it on acceptance. Read those lines before signing, and ask for a cap if there is none, because the bills can arrive even when the facility does not.

How long is a term sheet valid?

As long as it says. Most state an acceptance date, commonly a few weeks, after which the offer to proceed on those terms lapses. A pricing indication may also depend on market rates at the date of drawing. Accepting an indicative term sheet in time does not turn it into a commitment; it only moves the deal to credit approval or documentation. If a settlement date is approaching, check how long the bank will need after acceptance as well as the expiry date.

// WORKED EXAMPLEWHAT THE DOCUMENT DOES

Term Sheet: What It Binds and What It Settles

Nothing is lent yet, and most of the argument is over.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

A term sheet is the short paper on which a lender and a borrower set down the loan they are trying to document, and in most commercial lending it does not oblige anyone to advance money. Credit approval, legal drafting and conditions still lie ahead. Some paragraphs may bind on signature, commonly costs, confidentiality and exclusivity, so it needs reading for those. Its larger effect is practical. Credit approves from it and lawyers draft from it, and anything it leaves vague tends to be settled later on the lender's template, after the borrower's alternatives have lapsed.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

Issue 04 — Highview Industries. Same request as Issue 01 on the surface. A completely different file underneath. Your call first, then the senior banker's.

Read the file →

PART OF Loan Covenants, Explained

// 01 — WHY THE SHORT PAPER CARRIES THE ARGUMENT

A facility agreement can run to a hundred pages, and few borrowers can negotiate a hundred pages against a settlement date. The term sheet is where the deal is still small enough to see. Two or three pages state how much, for what, for how long, at what price, against what security, and on which tests. Both sides can compare it with another lender's paper while comparing still has some force.

For the lender it does a second job. It is the first time the relationship manager commits a structure to writing, and the credit paper that follows will usually be written around it. A structure that credit later refuses costs the banker credibility with the client. A structure the client has accepted gives credit something definite to approve or change.

// 02 — WHAT IT CONTAINS, AND WHAT BINDS

A complete term sheet names the parties, the facilities and limits, purpose, tenor and repayment, margin and fees, security and guarantees, financial covenants and test dates, conditions to first drawing, the main events of default, and an expiry date. The best ones also say whose definitions apply, because a covenant level means little until the words behind it are known.

Whether the paper binds depends on its wording and on what the parties then do. Lenders mark it indicative, or subject to credit approval and documentation, and that generally leaves either side free to walk away. The label is strong evidence but not the end of the matter. In 2010 the UK Supreme Court, in [2010] UKSC 14, found a binding contract despite subject-to-contract wording, because the parties' later conduct showed they had given it up. In Australia the High Court's 1954 classification of preliminary agreements (91 CLR 353) is still the starting point, and only its last class leaves the parties unbound until the formal document is signed.

The usual exceptions are written in on purpose. A paragraph may say that costs are payable whether or not the loan proceeds, that the terms are confidential, or that the borrower will not approach another lender for a stated period. Those paragraphs can be meant to bind from signature even when the rest is not, and a borrower should sign knowing which is which.

// 03 — THE EXAMPLE

A stock-feed miller, constructed for this page like every figure in it, is replacing an old mill and receives a term sheet marked subject to credit approval and documentation. The levels below belong to the example and are not a market norm.

Term loan, five years US$14.0m

Revolving facility US$ 3.0m

Establishment fee 17.0m × 0.75% = US$127,500, on first drawing

Legal and valuation costs up to US$38,000, payable if the deal proceeds or not

Covenant net debt ÷ EBITDA no more than 3.25×

The paper says EBITDA and stops there. The new mill will cost about US$0.9m in commissioning in its first year, an expense that will not recur. The finance director signs, the bank approves, and the valuer is paid. The first draft of the agreement arrives six weeks later with the bank's standard definition, which has no room for commissioning costs. The first test is then forecast like this, on net debt of US$14.5m:

EBITDA after commissioning costs 4.3

Standard definition: 14.5 ÷ 4.3 = 3.37× fails 3.25×

Commissioning added back: 14.5 ÷ (4.3 + 0.9) = 14.5 ÷ 5.2 = 2.79× passes

By now the competing offer has lapsed, the mill builder has a start date and the bank's approval rests on reported earnings, so any change must go back to credit. After a fortnight the bank agrees a one-off add-back capped at US$0.5m, which gives 14.5 ÷ 4.8 = 3.02 times. The miller has a covenant it can meet, with less headroom than it needed and a fortnight lost. In week one the same point would have been a single line in the paper, argued while another lender was still at the table.

// 04 — HOW IT DIFFERS FROM THE PAPERS BESIDE IT

An in-principle approval says the lender expects to be able to lend on the information it has so far, usually with less structure than a term sheet. A term sheet proposes the structure. A commitment letter is a lender's promise, given after credit approval and subject to stated conditions, and it often attaches a term sheet, at which point those terms carry the promise with them. Commitment letters are most common where a buyer must show that funds are certain, as in an acquisition.

A facility letter or letter of offer is the contract. In New Zealand and Australian mid-market lending, a file often goes straight from an indicative term sheet to a letter of offer, and the first moment the bank is bound is when that letter has been issued after approval and accepted. In syndicated loans, a mandate letter appoints the arranging banks and fixes their fees, with the term sheet attached.

DEFINED IN ONE PARAGRAPH → · READING YOUR FACILITY LETTER → · IN-PRINCIPLE APPROVAL →

// 05 — WHERE IT DECIDES A FILE

Price is the part of a term sheet everyone reads. The parts that decide how a loan behaves in a bad year are lower down: the definitions behind the covenants, the headroom against the forecast, the test dates, the cap on any personal guarantee, the threshold in the cross-default clause, and whether events outside the borrower's control are defaults or review events. Each is easier to change while it is a line in a short paper than once it is a clause in a long one.

Two term sheets side by side are rarely offering the same thing. A lower margin can be paid for with lighter security or looser covenants, and it is the lender's credit judgment, not the market, that sets those. The Term Sheet War puts a banker in that position, with a competitor's paper on the desk and a Friday deadline.

ISSUE 11 · THE TERM SHEET WAR → · LOAN COVENANTS, EXPLAINED →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

UK Supreme Court, [2010] UKSC 14, press summary — An agreement made subject to contract can become binding if the parties later agree to waive that condition, as the court held they had — section 02.

// QUESTIONS PEOPLE ASK

Is a term sheet legally binding?: Usually not as to the loan itself. A lender's term sheet is commonly marked indicative or subject to credit approval and documentation, which keeps both sides free to withdraw. Particular paragraphs, such as costs, confidentiality or exclusivity, may be drafted to bind on signature. The label is not conclusive, because courts look at the words and at what the parties did afterwards, so a borrower or lender who starts performing as though a deal is done can create an argument that one exists.
Can a bank change the terms after issuing a term sheet?: Yes, while the term sheet remains indicative. Credit may approve a different structure, a valuation may come in lower, or due diligence may show something the first conversation did not. Banks generally try to avoid moving on points they have written down, because a changed offer damages the relationship. Once a facility letter has been issued after approval and accepted, a change needs the agreement the contract requires, unless the contract itself gives the bank a right to vary.
Do you pay anything if you sign a term sheet and walk away?: That depends on the costs paragraph. Many term sheets make the borrower responsible for the lender's legal and valuation costs whether or not the loan goes ahead, sometimes up to a stated cap. An establishment fee is more often payable on first drawing, though some lenders take part of it on acceptance. Read those lines before signing, and ask for a cap if there is none, because the bills can arrive even when the facility does not.
How long is a term sheet valid?: As long as it says. Most state an acceptance date, commonly a few weeks, after which the offer to proceed on those terms lapses. A pricing indication may also depend on market rates at the date of drawing. Accepting an indicative term sheet in time does not turn it into a commitment; it only moves the deal to credit approval or documentation. If a settlement date is approaching, check how long the bank will need after acceptance as well as the expiry date.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Credit sanctionerHolds delegated authority and signs — or declines — the lending the front line brings.
Legal counselAdvises the bank on what it can do, drafts and negotiates what it signs, and manages what goes wrong.
Portfolio managerOwns the credit on a book after the money is out — reviews, covenants, ratings and early warning.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE FIRST QUESTION · THE LOAN · PROTECTION

A bank lends to a holding company whose only assets are shares in three operating subsidiaries. The subsidiaries have their own bank debt and trade creditors.

Where does the bank stand if a subsidiary fails?

7 MORE ON THE LOAN · PROTECTION →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHTerm sheet What is a term sheet in commercial lending, and how binding is it?