Negotiating a New Lease – Heads of Terms

A new lease is an important part of growing your business, but it also is a big commitment and carries with it certain risks, which is why they must be negotiated with care.

What are they?

The first document usually produced in a lease transaction will be the Heads of Terms. These are generally prepared by landlord’s agent and record the initial points agreed between the landlord and tenant, and which provide an outline of what should be included in the lease. Some of the points will be simple such as the rent and the length of the term, but there will also be more complicated points on how the lease will work.

Heads of Terms are also used to provide a basis for further negotiations on the more detailed points.

Are they important?

Heads of Terms are important and very common in commercial property transactions as they help to identify any issues between the parties at an early stage and speed up the drafting of the legal documentation.

The points agreed in the Heads of Terms can have a big impact on how your lease operates and so it is important that, as far as possible, you negotiate favorable terms and understand the implication of these terms at the outset.

There are various practical considerations to bear in mind when negotiating Heads of Terms such as:

• What other payments will you owe the landlord, aside from rent?
• Is VAT chargeable on the rent?
• Will the rental payments increase throughout the term of the lease and if so, how often and how will the increase be determined?
• What are you responsible for doing within the property?
• Are you able to vacate the property and terminate the lease before the end of the term?
• Will you be able to sell/transfer the lease to someone else or to sublet?
• What happens if the property is severely damaged by a fire or natural disaster?
• Will the lease have the protection of the security of tenure provisions of the Landlord and Tenant Act 1954?

Whilst Heads of Terms are not legally binding, they do demonstrate commitment to the transaction by both parties and the intention to proceed with the transaction on the basis of the terms agreed. Once the Heads of Terms are agreed, it is difficult to re-negotiate the key terms. Therefore, you should not agree to Heads of Terms until you are satisfied that you have considered all the issues and negotiated terms which are happy to proceed on.

How can we help you?

Before the Heads of Terms are finalised, we recommend that they are reviewed by our solicitors to ensure they accurately reflect your intentions and they are drafted in a clear and simple way to ensure  that there are no issues of interpretation later on in the transaction. It will likely save your business time and money if you have legal input at this early stage, so that you do not miss any negotiation points that could work to your advantage.

If you would like assistance with negotiating Heads of Terms or you would just like some advice on specific terms, please contact our commercial property team. Our goal is that from the outset of the transaction, you feel confident that you are getting a good deal.