Heads of Terms are the absolute “bread and butter” to the property industry. Done correctly, and everyone is a winner. Preparation of Heads of Terms are, properly, the domain of the surveyors and an accurate and fully negotiated set of Heads covering all of the key points will be vital for both landlords and tenants.
In this article we will consider what can be included in an ideal Heads of Terms, to make legal negotiations as straightforward as possible.
- First off, the Parties. Although this seems obvious but knowing exactly what is being let and who your tenant is, does help. Including the company number of the landlord or tenant would be a help as the name might change but the number never does specify if there is a Tenant Guarantor and if so, determine whether that Guarantor is an Individual, a Company, or a Foreign Company.
- In terms of the property address, having a plan attached to Heads does make a big difference. In the majority of cases the surveyor will have visited the property, but the lawyer will have not.
- Any shared spaces in the Property? – Does the property share a car park or have a designated number of spaces? Is there any space in a multi let building which tenants can use or book and, if so, how will that be paid for?
- The duration of the lease is generally straightforward. We just need to know if there is a break option, is it tenant only, landlord only or mutual? Does the tenant have to pay anything to break the lease and are there any tenant incentives if they don’t exercise the break?
- Options to extend – is it clear when and how the option to extend can be exercised?
- Rental Terms – how much and how often? Will there be fixed rent or rent review? Rent review is still one part of the draft lease where lawyers will generally defer to surveyors. Is the rent market value rent or index linked? If the rent is index linked, is there a “cap or a collar” to apply?
- Repairing obligations – for Heads of Terms, one of the following options generally apply:
- Full repairing
- Full repairing but subject to a schedule of condition
- Internal repairing only
- Internal repairing but subject to a schedule of condition
- Internal decoration only
- Rent inclusive of repair costs
- If it’s multi let and the landlord looks after the common parts and re-charges via service charge, is there any cap on service charge?
- It is good to know who is taking responsibility for the preparation and cost of any Schedule of Condition, if the repairs are to be subject to its current state of repair and condition.
- For alterations, alienation and insurance, unless there is anything specific about the premises or the covenant of the tenant, Heads of Terms could simply state that “PSG Model Commercial Lease wording will apply”.
- Finally, is there anything special about this property or the tenant which needs to be taken account of in the lease itself? If so, mentioning it at Heads of Terms stage might prove to be a lifesaver if either party wants to rely on it at a future date.
And of course, at the risk of stating the obvious, always ensure that the Heads are “subject to contract” so that the parties don’t unwittingly find themselves bound into a legal relationship before lawyers are even instructed.
It’s imperative that your commercial lease is carefully drafted in accordance with the agreed terms specified in the Heads of Terms. For help getting started or drafting your lease please do not hesitate to contact our specialist team here at Onyx Solicitors on 0121 268 3208 or email us at firstname.lastname@example.org with your query.