Lauren Walker, a Partner in our Real Estate Team, looks at some of the key terms you may wish to consider when agreeing Heads of Terms for a new commercial letting.
Agreed Heads of Terms form the commercial framework for a new lease. While they are generally expressed to be subject to contract and legally are not binding (save in specific circumstances), they are a critical stage in the leasing process.
Clear and carefully negotiated Heads of Terms can significantly reduce the risk of misunderstanding, delay and unexpected costs once solicitors are instructed. Below is a summary of some of the key terms that both Landlords and Tenants should consider when agreeing Heads of Terms for a new lease in England and Wales.
Extent of Demise
The Heads of Terms should clearly describe the extent of the property to be demised under the lease. It can be helpful to have an indicative plan annexed to the Heads of Terms.
Rights to be granted and reserved
Parties should agree any rights to be granted for the benefit of the Tenant and/or any rights to be reserved for the benefit of the Landlord. This can include matters such as parking rights, rights to use common areas and service media.
Rent
The rent is a fundamental commercial term and should clearly confirm the proposed initial rent, address the VAT position in respect of rent, confirm the frequency of payments and any rent-free or stepped rent arrangements. It should also confirm whether there is to be any turnover rent.
Rent Reviews
If the lease includes rent reviews, the Heads of Terms should state the timing and basis of such reviews (for example, open market or CPI-index-linked).
Term
The Heads of Terms should specify the length of the lease term including the commencement date (whether the term begins on completion, in the future or is backdated).
Security of Tenure
The parties should agree whether the lease will be inside or outside of the security of tenure provisions of the Landlord and Tenant Act 1954. Please see our articles on Security of Tenure for further information:
- https://www.fsp-law.com/what-is-security-of-tenure-in-business-leases-part-1/
- https://www.fsp-law.com/what-is-security-of-tenure-in-business-leases-part-2/
If the lease is to be contracted out, this should be made clear at the Heads of Terms stage as a statutory procedure must be followed.
Break Options
Break options allow either party to bring the lease to an end early. Heads of Terms should clearly record who can exercise the break, when the break can be exercised and any conditions attached to the break option.
Assignment and Dealings
The Heads of Terms should summarise the Tenant’s ability to deal with the lease, including underlettings, assignments and charging of the lease as well as any options for sharing occupation.
Permitted Use
The Heads of Terms should clearly identify the proposed intended use of the property.
Alterations and Fit Out
Heads of Terms should address whether the Tenant is permitted to carry out initial fit-out works and if a licence to alter is required. They should also confirm what types of alterations are allowed during the term (internal, external, structural, non-structural) and whether any conditions apply (such as obtaining Landlord consent).
Insurance
The parties need to agree who will be responsible for insuring the property, how the insurance rent will be recovered and any obligations on each party in respect of the insurance of the property.
Repair
The repairing obligations of both parties should be clearly defined, including:
- Whether the lease is full repairing and insuring (FRI)
- Whether a schedule of condition will limit tenant repairing obligations
- Whether any previous lease obligations need to be rolled into the new lease
Rent Deposit
Where a rent deposit is required, the Heads of Terms should confirm the amount of deposit required and the circumstances in which the Landlord can draw on it, as well as any conditions for its release.
Costs and Legal Fees
The Heads of Terms should also confirm whether the parties will be responsible for their own legal costs or whether one party will contribute towards another’s legal costs.
There are a lot of factors to consider when preparing and agreeing Heads of Terms for a commercial letting and the above is not to be considered an exhaustive list. The Heads of Terms required will depend on each specific property and agreement between parties. It is important that these are done right to assist the transaction in progressing swiftly and without the need for renegotiation.
If you require advice on Heads of Terms, please do not hesitate to reach out to our Real Estate Team.
This article is for information only and does not constitute legal advice. We recommend seeking professional advice before taking any action on the information provided. If you would like to discuss your specific circumstances, please feel free to contact us on 0118 951 6200.
