What are Heads of Terms?
Heads of Terms are a list of the terms agreed in principle between the landlord and the tenant, before the grant of a lease and form the basis of the terms to be included in the legal document.
They can also deal with any other agreements between the landlord and tenant, such as timescales or alterations.
How improving your Heads of Terms could help you
There are several issues which come up in most lease negotiations. If these issues are dealt with beforehand in the Heads of Terms then this could lead to a quicker completion.
Tips:
- Include the break conditions
Including the break conditions in your Heads of Terms may save you time during the negotiation of the lease. If the break conditions are not included, the respective solicitors will have to negotiate the break conditions which could result in delays if there are disagreements.
- Be clear on assignment
There is potential for disagreements between landlords and tenants on the conditions for assignment.
A tenant could try to ensure that a guarantee from the outgoing tenant can only be required where it is reasonable to do so. However, a landlord may try to impose a guarantee regardless. A common compromise is that a guarantee from the outgoing tenant is required on the transfer of a lease but that a third-party guarantor and/or rent deposit may only be required where reasonable.
Including wording on this in the Heads of Terms may save you a lot of time and hassle.
- State the position on underlease rents
It could be helpful to make the position on underlease rents clear in the Heads of Terms to avoid the need to discuss the issue further.
In many cases, the common position is that the underlease rent is the open market rental value for the premises. However, this is not always the intention for the parties so making the desired position on underlease rents clear in the Heads of Terms may be beneficial.
- Be clear on the repair obligations
Tenant’s solicitors may seek to change a standard repair obligation. If this has not been agreed previously, it can cause significant delays because the solicitors will have to spend time agreeing the position.
Therefore, it may be good to state the repairing obligation in the Heads of Terms so that the position is clear for all the parties involved from the outset.
- Agree on rates relief indemnities
If a commercial tenant vacates the premises during the term, they could claim relief from business rates whilst the property is empty. This can be problematic for landlords because if a tenant has already claimed the relief, the relief may not be available to the landlord at the end of the lease.
Therefore, a commercial lease may often include an indemnity requiring the tenant to compensate the landlord against any rates relief which the landlord is unable to claim because the tenant has already done so.
There is a likelihood that tenants and landlords could disagree on the inclusion of these types of indemnities so it would be beneficial for the parties to agree the position at an earlier stage. This will hopefully help to avoid any lengthy negotiations over this issue.
- Provide the lease plan
It is a good idea to provide all parties involved with the lease plan as early as possible. This will help to move the deal forward quicker because the tenant’s solicitor can commission searches sooner, and the landlord’s solicitor can identify any issues with the proposed demise and deal with them in the first draft of the lease.
- State if third-party consent is required
The requirement for a third party’s consent often causes delays in transactions. If third-party consent is required (e.g. from a superior landlord or lender) it could be beneficial to put this in the Heads of Terms. This will help to ensure that it is dealt with sooner rather than later.
You could also agree on who will be paying the costs for the consent in the Heads of Terms so there are no surprises for either party when the funds are requested.
- Include details if an overseas entity is involved
Overseas entities that own property in the UK are now required to be registered on the Register of Overseas Entities at Companies House. This includes companies that own a leasehold interest for seven years or more.
If relevant, it may be good to include details of the relevant party’s OE number in the Heads of Terms to make the registration status clear at the outset.
If you want to speak to an expert on commercial leases then please call Nick Attwell on 01473 229200 or email Nick at nick.attwell@attwells.com.
