When you are looking to enter in to a commercial property transaction, especially a commercial lease, heads of terms can be used to set out underlying future intentions and expectations ahead of the contract being prepared, without being legally binding.
What Are The Heads Of Terms In Commercial Leases And Property Transactions?
The supporting evidence of heads of terms is to set out the key terms accepted by the parties in a commercial transaction, without being legally binding. That is why it is essential to ensure that the document is undoubtedly marked ‘subject to contract’. In some cases, heads of terms have been alleged by the courts to be legally binding, so if you are in any uncertainty as to the legal status of a document, you should look for legal guidance from our commercial property solicitors.
Who Produces Heads Of Terms In Commercial Property?
Generally, heads of terms will be produced by or on behalf of the landlord of the commercial premises. A surveyor will create the first draft for the approval by all parties, but increasingly, landlords have become more involved in negotiating heads of terms themselves.
What Do Heads Of Terms Cover In Commercial Leases And Property Transactions?
A list of details that will be covered in heads of terms are mentioned below:
- Complete description of the land
- The parties including contact details
- Property specific problems to be considerer
- Rates or rent
- Circumstances which the transaction is subject to, i.e. board approval, planning agreement
For commercial property leases
- Parties – including a guarantor
- Term – length of the lease term
- Security Of The Tenure – whether the lease will be within the protection of the landlord
- Break Clause – the landlord will decide if the lease will have break in it and, if so, whether there are any conditions that are required before the break is effective
- Rent –including the amount decided, method and mode of payment
- Rent Review – if the rent needs to be reviewed, when and on what basis the rent amount is set
- Rent Free – the landlord may allow a rent-free time period to support the tenant to fit the property before legally occupying for the purposes of its business
- Rent Deposit – if a deposit is payable, when and how much will be reimbursed to tenant
- Insurance – who’s to insure the property
- Use – for what purpose the property needs to be used; if the tenant can change the use
- Alienation – whether the tenant can lease or whether the tenant has rights to allot its lease to a third party
- Repair – the standard of repair which the tenant is required to put and keep the property in
- Alterations And Signage – what modifications and signage the tenant can make and whether the landlord’s approval will be needed
- Fitting Out – if a tenant requires variations to the property to make it potentially fit for use, then the extent of the variations may be settled at this phase
- Enabling Works – it might be essential for a landlord to carry out enabling works to place the property into a state where the tenant is able to fit it out
- Costs – whether each party is responsible for its own costs
- Other Documentation – It might be necessary to enter into a rent deposit; a license for variations; or an agreement for lease. An agreement for lease binds the parties legally to enter into the lease, and other documentation, once a critical condition has been discharged, i.e. the landlord completing enabling works, or the tenant obtaining planning permission for its intended use
Do Terms Change?
Yes, the terms can change.
It is not unusual for terms to change as a transaction develops, or for the parties and/or their advisors to have a difference of opinion when interpreting heads of terms. It is important to continue to track the heads of terms to ensure that any changes are picked up in the documentation.
Checking The Documentation Against Heads Of Terms
It’s always vital to check the ‘agreed’ documentation against the heads of terms to ensure that the terms are correctly reflected. You must consider preparing a report which picks out the main terms as this can act as a useful aid in checking that document reflects the heads of terms.
How Do You Know If You Need Legal Advice For Your Heads Of Terms?
Generating useful heads of terms can be complicated. Whenever possible, and depending upon the size of the transaction, we would recommend instructing your solicitor to act on your behalf. Not only do they deal with heads of terms on a daily basis, but they’ll be able to add value by advising as to whether the heads of terms are fully acceptable.