Understanding Heads of Terms: Key considerations for the leasing of commercial property

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This article explains Heads of Terms in depth and highlights key considerations in relation to the leasing of commercial property.

What are Heads of Terms?

When negotiating a deal for a lease of commercial property, Heads of Terms are an essential document for both parties. It provides the basic structure for the transaction and outlines the commercial terms agreed between the parties to be included in the lease and any ancillary documents.

Are Heads of Terms legally binding?

Heads of Terms record the agreed commercial position of the parties at the time they are issued but the specific and detailed provisions will be negotiated and contained in the lease. Properly drafted and agreed Heads of Terms are, however, invaluable to a lease transaction as they provide the foundation on which the legally binding documents will be granted. This enables the smooth running of the process, cutting down the need for extended correspondence on the commercial terms, which also reduces the associated costs.

What are the main things to include?

The Royal Institution of Chartered Surveyors (RICS) Code for leasing business premises includes a non-exhaustive list of matters to be considered when drafting Heads of Terms. This is a good guide when starting to negotiate terms. However, it is worth noting that there will be varying levels of detail to be included in order to personalise the transaction to cover the requirements of each party.

Heads of Terms will normally include the following:

  • the identity and extent of the premises (and requiring the landlord to arrange the provision of a Land Registry-compliant plan if the lease is registerable);
  • any special rights to be granted, such as parking or telecom/ data access;
  • the length of term;
  • any options for renewal or break rights;
  • any requirements for a guarantor and/ or rent deposit;
  • the amount of rent, frequency of payment and whether exclusive of business rates;
  • whether the landlord intends to charge VAT on the rent;
  • any rent-free period or other incentive;
  • any rent reviews including frequency and basis of review;
  • liability to pay service charge and/ or insurance premiums;
  • rights to assign, sublet, charge or share the premises;
  • repairing obligations;
  • the initial permitted use and whether any changes of use will be allowed;
  • rights to make alterations and any particular reinstatement obligations;
  • any initial alterations or fit-out (if known); and
  • any conditions of the letting, such as subject to surveys, board approvals or planning permission.

Final thoughts

In addition to taking into consideration all of the above, the Heads of Terms should be a clear and succinct document detailing exactly what the parties are entering into and what the final result should look like. Indeed, the Heads of Terms should not be a completely technical document with technical wording but instead a marriage between the legal aspects and commercial terms.

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