Heads of Terms – Leases

At the beginning of a landlord and tenant matter the parties will negotiate the main terms of the lease and set them out in a document. This document is referred to as the Heads of Terms

Who negotiates and drafts the Heads of Terms?

Often a surveyor will be appointed by a landlord to draw up and negotiate Heads of Terms. A tenant may appoint their own surveyor. It is important that solicitors also review the Heads of Terms before they are agreed to sense check them.

What will the Heads of Terms cover?

The Heads of Terms will typically include:

• Identity of the parties – there may be a simple answer to this but the tenant may wish to use a subsidiary or a new company established just for this purpose.
• Property – both parties will want to make sure the tenant is going to be occupying and using the expected areas. This is achieved by using and agreeing a detailed plan.
• Length of term – a landlord may have a certain term it is willing to grant, which a tenant may look to increase or decrease.
• Permitted use – the parties should agree the use of the property in order that it will allow the tenant to use the property as it wants to.
• Rent – the level of rent is often seen as the headline term to be negotiated between the parties. The type of rent e.g. market, turnover or stepped, will need to be discussed and agreed as well as the amount.
• Rent review – the longer the term of a lease is the more likely it is that there is a review of the rent. Rent reviews can be carried out in a number of ways, for example an open market valuation or linked to increases in RPI/CPI.
• Break clauses – it is common that a lease contains break clauses allowing the parties to terminate the lease at certain points. These may be tenant only break options, but can be for each or either party. There are often conditions to be met when exercising a break option.
• Repair liability – whilst landlords may be happy for a tenant’s repair liability to be uncapped and apply to the whole of a property, tenants will often want to see this limited.
• Service charge – if a tenant is occupying part of a building or an estate owned by the landlord, then the landlord should consider what services it will provide and be charged to the tenant, for example cleaning any common areas and maintaining a car park.
• Rights – the tenant needs to think whether they require any rights, for example to access the property or to use car parking spaces. The landlord should at least retain rights to enter the property to carry out certain works.
• Rent deposit –the landlord should consider whether they require a rent deposit from the tenant.
• Tenant works – it is important to know whether the tenant will be carrying out any initial fit-out works to the property. The landlord will want to review the fit-out plans and provide consent to the works.

What role does a solicitor have?

It is quite common for a client to approach a solicitor asking them to have a look over the Heads of Terms and asking if anything is missing or seems unfavourable. The earlier this is done the better – alongside the surveyors we can provide valuable practical advice on potential issues and items that could be changed to benefit the parties.

If you need any advice on Heads of Terms, please contact a member of our commercial property law team in confidence here or on 02920 829 100 for a free initial call to see how they can help.

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