Heads of Terms - issues to consider

Heads of Terms for the grant of a lease set out what has been agreed between a landlord and a tenant.  The aim is to speed up the drafting of the legal documentation.  Whilst Heads of Terms are usually not legally binding, it will be difficult for a party to negotiate away from what was agreed at a later stage.  It is therefore important to consider the Heads of Terms carefully and it is good practice to get these reviewed by your solicitor before they are agreed.

Set out below is a list of key issues to consider when negotiating the Heads of Terms:

1. Tenant – it is important to include the identity of the tenant as the landlord may have carried out financial due diligence into the tenant before agreeing the Heads of Terms.  If the wrong tenant details are used then this could lead to a delay in completing the lease;

2. Property – the extent of the property should be made clear, particularly when dealing with a lease of part of a building.  Ideally a plan should be attached to the Heads of Terms.  It is also helpful to identify whether any car parking spaces will be included;

3.  Term – as well as the obvious point about how long the lease will be granted for, the parties should also consider:

(a) break options – will the tenant and / or the landlord have a right to terminate the lease early?  If so, will this be on a fixed date or at any time during the lease?  How much notice is required?  Will the break be subject to any conditions?

(b) security of tenure – will the lease be granted with security of tenure?  In other words, will the tenant have a statutory right to apply for a new lease at the end of the term (which the landlord can only oppose on certain grounds)?

(c)  option to renew – will the tenant have a contractual right to extend the term of the lease?  If so, on what basis?

4. Rent – the issues to consider here are:

(a) initial rent – what will this be?

(b) rent free – will the tenant have the benefit of a rent free period?

(c) payment frequency – will the rent be payable monthly or quarterly?

(d) rent reviews – will there be any rent reviews?  If so, on what basis and how often?

5. Security – does the landlord require the provision of any guarantees and / or rent deposits?  If a rent deposit is to be given, how much is required and will the landlord agree to any early release provisions?

6. Service charge – will a service charge be payable?  If so, will this be a fair proportion or based on a fixed percentage?  Will there be a cap on the tenant’s service charge liability?

7. Insurance – the usual position is that the landlord will arrange the buildings insurance with the tenant paying the premium (or a fair proportion if taking a lease of party).  However, who will be responsible for damage caused by an uninsured risk?

8. Alienation – the issues to consider here are:

(a) assignment – a tenant is usually permitted to assign the whole of the lease only (subject to first obtaining the landlord’s consent).  When can the landlord refuse consent to assign the lease?  What conditions can the landlord impose on granting consent to assign the lease?  In particular, will the landlord have an absolute right to call for an Authorised Guarantee Agreement?

(b) underletting – will the tenant be permitted to underlet the whole and / or part of the property (subject to landlord’s consent)?

(c) group sharing – will the tenant be permitted to share occupation of the property with a group company?

9. Repair – will the tenant’s repairing obligation be limited by reference to a photographic schedule of condition?

10. Alterations – will the tenant be permitted to make internal and / structural alterations (subject to first obtaining the landlord’s consent)?  Will the tenant be permitted to install, alter and remove internal, non-structural partitions without landlord’s consent?

11. Permitted use – what will the authorised use of the property be?  Is planning consent needed for the proposed use?

12. Conditions – will completion of the lease be conditional?  For example:

(a)  Planning permission – is permission needed for the proposed use of the property and / or any proposed alterations?

(b) Superior consents – will the landlord need to obtain the consent of any superior landlord / the landlord’s mortgagee?

(c)  Works – is the landlord required to carry out and complete any works before completion of the lease?

(d) Licences – does the tenant need to obtain any licences prior to completion for the lease?

The Code for Leasing Business Premises in England and Wales 2007 contains a model set of Heads of Terms which can be viewed by clicking here.