Karen Mason, an experienced commercial property lawyer and co-founder of Newmanor Law, a specialist real estate law firm, discusses the importance of Heads of Terms in lease negotiations.

 

As businesses return to workplaces once again, many occupiers will be looking to either renegotiate lease terms or agree new leases to redefine their situation, given a growing acceptance that remote working will form part of the working week.

The question of space utilisation may lead some businesses to downsize; whilst others looking to space their people apart may ironically need bigger offices or more locations.

Different requirements will mean new agreements, requiring Heads of Terms to tie down what is being agreed, with the need to secure a good long-term deal critical for businesses in the post-Covid world.

Heads of Terms provide a written record of the main terms of a deal. But critically, they have traditionally been resolved before involving solicitors, which can cause problems and delays later on. Heads of Terms should provide the framework for the deal and also deal with how it should be executed.

Early advice will save problems later

When Heads of Terms are drafted without advice from an experienced real estate lawyer, lack of detail may result in a long list of questions to answer before the deal can be delivered. This leads to time wasted going backward and forward on the terms agreed.

In general, Heads of Terms usually include points such as the price of the deal; the identities of the parties involved; the basic purpose of the contract; the terms of the contract or transaction; confidentiality agreements, and any protection for the parties should the transaction not proceed.

Ensuring the Heads of Terms are not legally binding is a vital aspect of drafting them, since the detailed provisions will be included in the contract documentation.

Using the phrase ‘subject to contract’ will help ensure this is the case. But in many cases, the actions of the parties after the Heads of Terms are drawn up will have as much impact on whether the provisions are seen as being legally binding as the actual wording of those provisions.

If, for example, the parties start to deliver the obligations set out in the Heads of Terms before a legally binding contract has been finalised, then the very act of doing so may be taken as an indication that these obligations are accepted as being legally binding.

For a lease agreement, these provisions might include:

• Details of the property itself; the address, whether it’s freehold or leasehold and whether the transaction deals with lease of the whole or part of the property.
• The details of any professional advisers working for the parties. For example, solicitors, accountants, agents, etc.
• The parties involved in the transaction, including any guarantor required, with names, contact details and whether the property is being let to a limited company or an individual.
• The length of any proposed lease term.
• The level of any security of tenure being proposed; particularly whether any lease will be covered by the Landlord and Tenant Act 1954.
• Whether any lease will include a Break Clause and, if so, whether there will be conditions to trigger it.
• If rent is being paid, the Heads of Terms will itemise the amount, the frequency and method of payment.
• The frequency of any rent reviews and the method of review.
• The length of any rent-free period while the tenant is fitting out the property before formal occupation.
• The amount (if any) of any other incentives to take the lease.
• Whether a rent deposit is payable and if so, how much and when it will be reimbursed.
• Who is responsible for paying building insurance and if it is included as part of the rent.
• What purpose the property can be used for and whether the tenant can change that use in the future.
• If the tenant is allowed to sublet the property or assign the lease to a third-party.
• Whether each party is responsible for their own costs, or if one has agreed to meet the costs of all parties.
• Whether the tenant is permitted to carry out alterations.
• A timescale detailing how long the transaction is expected to take.
• Adding a target completion date may also help to stop further negotiations becoming protracted.

Not binding but an invaluable guide

Once the Heads of Terms have been agreed they will act as a guide and a benchmark for measuring progress. They can be changed as the details of the negotiation emerge. However, these should be reflected in the documentation itself.

Heads of Terms will become increasingly important in commercial property deals, as they provide the framework for efficient and successful deal execution.

It is important to understand the benefits of engaging specialist legal advisers at the outset, who recognise Heads of Terms should be all about preparing for efficient deal execution and success.

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