Commercial Property Solicitor Patsy Whitford looks at heads of terms for commercial leases, discussing what should be negotiated, what should be included within the terms and what to watch out for as a commercial tenant.
If you are specifically looking for guidance on heads of terms for corporate transactions, we have a dedicated article which can be read here.
What are heads of terms for a commercial lease?
Heads of terms, also known as a memorandum of understanding, are a list of the items agreed between the landlord and the tenant, prior to 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.
Are heads of terms legally binding?
The heads of terms are not legally binding as neither party are committed to proceeding right up until point the legal documents are signed. That said, they are considered to be indicative of both parties intention to proceed to completion, as why take the time to agree these items, until everyone is certain they want to proceed.
Are heads of terms negotiable?
Absolutely! Both the landlord and the tenant should negotiate these terms to ensure the obligations agreed are a balanced outcome for both parties. Tenants should never consider the heads of terms suggested on the agent’s details are set in stone and should seek to negotiate these to both parties benefit.
How to negotiate heads of terms
As the heads of terms govern the form of the legal documents, they should be as detailed as possible, with as many of the key points agreed up front as possible. The more items that can be agreed between the landlord and tenant at the start of the matter, the smoother and quicker the transaction can be.
That said, tenants should not agree to anything which they do not fully understand the implications of, so if you have any questions, please contact us to discuss, prior to agreeing.
What should be included in the heads of terms for a commercial lease?
Many of the heads of terms we see are quite limited in the terms set out. This means you will often incur time and expenses to negotiate these points later down the line, which doesn’t benefit either party.
The RICS Code for leasing business premises is a really good guide as to what should be discussed and agreed between the landlord and tenant at the start of the transaction. It also contains some explanation of the key terms, such as break rights and exclusion of security of tenure.
It contains a list of the bare minimum that should be agreed and a helpful template heads of terms, which both landlord and tenant could work through during their initial negotiations.
What to look out for in the heads of terms for a commercial lease
As a tenant, there are a few things you specifically consider. The main items, such as the rent and term, are fairly obvious, but you should also consider other things which will impact on your annual expenditure such as:
- is any VAT is being charged on the rent
- what is the annual service charge
- what is the annual buildings insurance
- is the property listed or under any other restraint
- what is the authorised planning usage of the property
- will a rent deposit be requested and if so, can you agree to it being returned after a set period, rather than the end of the term
Do I need a solicitor to negotiate heads of terms for a commercial lease?
No, not necessarily. Provided you are confident you understand what you are agreeing to, and you can agree a comprehensive set of terms, you can save time and hassle in negotiating the heads of terms yourself.
This is also often a chance to start to build a personal relationship with the landlord/tenant, which can stand you in really good stead throughout the term of the lease.
However, if you would like some advice as to how to protect your position, or assistance with negotiating all of the heads of terms, or just specific ones, we would be happy to assist. Please contact our bright team below.
Commercial Property Solicitors
If you have any queries following this article, please get in touch with our bright Commercial Property team for expert advice.