Tips on negotiating Heads of Terms on property transactions
Getting a set of heads of terms that fairly describe the terms of a new letting is a balancing act. Too little detail in the heads of terms and you risk encountering unforeseen commercial or practical obstacles in a transaction when you are already well advanced in your legal negotiations. Too much detail at the heads of terms stage and you risk wasting time by ‘rehearsing’ the negotiation of the deal itself.
However, sellers and buyers, landlords and tenants can benefit from seeking early advice from a lawyer or a surveyor on the terms of any deal. FSP cannot advise on the commercial terms such as the appropriate price, rent free period, costs of works, or market rent in the same way as a surveyor can, but an early conversation with one of our expert property lawyers can act as a sense check to ensure that all the key legal points are covered.
One of the basic starting points is to understand who is involved in the deal. You should check that you have identified the owner of the property or the identity of any corporate occupier or buyer. Is either of the parties a foreign entity? If so, you should consider the need for a legal opinion from that jurisdiction. Is either party a newly incorporated company? If so, consider whether you need any further comfort on their ability to perform the obligations of the contract, for example, in the case of a new letting, consider asking for a guarantor for the tenant, or a rent deposit. Don’t forget that corporate identity is specific – the fact that a company is part of a large, well-funded group does not of itself give you the benefit of that.
It may seem obvious, but the next key point is to identify the property! Is it all included? Are the plans of the property up to scratch, especially if it’s a sale of part of the property, or a lease for over 7 years which needs to be registered at the Land Registry? Poor plans cause delays in making progress later, or problems with registration that are better headed off early on.
In the case of taking a lease, do you need rights over other property not shown on the plan? What about parking, bin or bike stores, communal changing or showers, electric car charging points, shared mail or reception facilities, plant compounds for air conditioning, plant or signage sites?
Heads of terms will contain the financial aspects of the deal too, but that does not have to be limited to such things as the purchase price or the amount of the rent. You should use the heads of terms to pin down other issues, such as the VAT status of the parties, rent or price instalment payment dates and in the case of leases, whether there is a service charge or insurance rent payable. Is the buyer a cash buyer, or using banking funding (which can make matters take a bit longer)?
Repair and risk
If you are buying a building or taking a lease, have you considered having a building survey, M&E and/or utilities survey? If you are considering this, make sure that the heads of terms state that your offer is “Subject to Survey”. Fully understanding the state of repair of the building may determine whether you buy the property at all, or the price you pay, or, in the case of a new letting, whether you can safely accept a full repairing liability: if the property is second-hand you may want to insist that the landlord either does some works pre-completion or that your repair and decoration obligation is limited by reference to a schedule of condition.
Timing is often a key issue. You may be relocating, meaning you must also consider your exit from your existing premises and all the issues that flow from that. If you need to be in and trading/operational in a certain timeframe, you should ensure that the heads of terms set out a timetable, particularly if you need to carry out any fit-out works. You will need some overlap between the new and old space or you may be answering the phones surrounded by building workers!
Is this deal commercially sensitive? Have you considered the confidentiality and exclusivity agreements? You probably don’t want the other party to (a) gazump you or (b) look elsewhere if you are investing a lot in searches, surveys, designers (and legal) costs, but time spent negotiating an exclusivity agreement can divert from doing the actual deal or (c) to tell your staff that you are moving away.
Well negotiated heads of terms allow us as your solicitor to produce a first set of draft documents that represent what has been thoughtfully agreed by the parties. This allows your transaction to move more quickly and can reduce the risk of incurring abortive costs, to get you off on the right foot with what is almost certainly a major business decision for you, and already stressful enough.
This note is intended to give a flavour of some of the issues that you need to consider, but each deal is different. We are always happy to speak to you to assist with what is an important part of any transaction.