Negotiating a commercial lease can be a complex process. While lawyers working in commercial property are in a unique position to witness a wide range of Heads of Terms, negotiating a lease can be a challenging process that involves navigating common issues that arise. Here we will go through some practical guidance to help you improve your Heads of Terms and secure a quicker lease completion.
Include break conditions
Heads of Terms vary significantly in detail, from a bare skeleton that confirms little more than the term and rent to a thesis that is not far off writing the lease itself. While there is a balance to be had, practically speaking, it should lean closer to a short summary of the key terms. One common issue that arises when negotiating a lease is the break conditions. To save multiple revisions of the draft lease, it’s essential to set out the break conditions in the Heads of Terms or state that the break will be unconditional.
Be clear on assignment
Conditions on assignment, such as providing an Authorised Guarantee Agreement (AGA), a third-party guarantor, or paying a rent deposit, are typically not negotiated if they are standard. However, a well-advised tenant will seek to ensure that an AGA can only be required where it is reasonable to do so. A simple line in the Heads of Terms stating that “an AGA is to be provided on any assignment” can save a lot of time discussing this.
Commercial leases tend to place several requirements on any underletting, and one of them is the underlease rent. This can either be the open market rent for the premises being underlet or the passing rent under the lease. The issue for the landlord is that the open market rent may reduce between the grant of the lease and the grant of the underlease. If the landlord inherits the underlease, there will be a shortfall in the rent they expected to receive. Making the position clear in the Heads of Terms avoids the need to discuss the issue further.
Unless otherwise agreed, it is usually assumed that the tenant’s repairing obligation will be in the standard institutional form – “the tenant shall keep the property in good and substantial repair and condition.” It is worth stating the precise nature of the repairing obligation clearly in the Heads of Terms to make the position clear before referring the matter to solicitors.
Unless an inclusive rent is agreed, it is standard for a commercial tenant to be responsible for business rates payable in respect of the premises. The issue for the landlord is that if the tenant vacates the premises during the term, they may claim relief from business rates whilst the property is empty. Making it clear in the Heads of Terms whether the landlord or tenant is responsible for business rates during periods of vacancy will save time in the lease negotiation process.
In conclusion, Heads of Terms are essential to secure a quicker lease completion. By considering and addressing common issues in the Heads of Terms, you can avoid unnecessary delays, save time and costs, and achieve a smoother and more efficient lease negotiation process.
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Please note that this blog is not intended to be legal advice. This material has been prepared for informational purposes only and as general guidance. Is not intended to provide, nor should it be relied on for, legal or tax advice. You should consult your own advisors or seek professional independent advice before engaging in any transaction.