Heads of Terms (HOT) are a key component in a commercial lease transaction and often kick-start the lease negotiations between the landlord's and the tenant's solicitors.
They set out the agreed lease terms between the parties and are referred to by the solicitors throughout the transaction when drafting and negotiating the lease documentation.
The landlord's surveyor is usually responsible for preparing the HOT. The more detailed they are, the smoother the transaction is likely to be, and a well-drafted, comprehensive set of HOT can play an important part in ensuring that lease negotiations do not become protracted.
So, what might be included in an ideal set of Heads of Terms?
The Heads of Terms should provide the property's address and whether the tenant will be occupying the whole or only part of the property (and if so, which part, e.g. the ground floor).
Having a plan attached is also very helpful, as the surveyor will have visited the property, but the solicitors are unlikely to do so.
Details of any shared car park or other common areas the tenant will have rights to use should also be provided in the HOT.
The Heads of Terms should provide the full names of the landlord and the tenant and any other parties to the lease, such as a guarantor. If any of the parties are a company, the company number should also be provided, as a company name can change, but the company number will always stay the same.
Details of the parties' solicitors should also be included in the Heads of Terms to ensure the timely sending or requesting of the draft lease documentation once the Heads of Terms has been circulated.
The Heads of Terms should specify how long the lease term will be, e.g. 5/10 years.
They should also confirm whether or not the lease will be a 'protected' tenancy within the Landlord and Tenant Act 1954.
Suppose the landlord or the tenant (or both) can terminate the lease early by exercising a break clause. In that case, details about this should also be provided, including the break date, notice periods and conditions attached to the break clause.
The Heads of Terms will need to specify the amount of annual rent agreed between the parties and other associated terms, such as any rent-free period, rent reviews and other inducements.
If there is to be a rent review, what type of review will it be, e.g. upwards only open market, stepped or linked to RPI?
If the latter, the HOT should explain the mechanics for the RPI rent review as these clauses can be complicated and come in various forms; therefore, it is important to ensure that the solicitors have accurate Heads of Terms in this regard to avoid any disasters when it comes to calculating the first rent review under the lease.
The surveyor is best placed to advise on rent levels and rent review and should have detailed discussions with the parties at this outset.
If the landlord requires a rent deposit from the tenant as security for any breach of the lease by the tenant, details should also be provided.
Repairing obligations are another aspect of the HOT, which receives a higher focus and discussion between the surveyor, landlord and tenant.
Currently, tenants are better advised and less likely to accept 'full repairing' obligations in their leases. Landlords also appear more realistic regarding repairing liabilities they can pin on tenants.
Examples of different repairing liabilities include full repairing, full repairing with a schedule of condition, internal repairing and internal repairing with a schedule of condition.
Suppose the landlord is retaining some responsibility for repair, e.g. the structure and common parts in a multi-let building.
In that case, the costs to the landlord are likely to be recharged to the tenants via a service charge, and the Heads of Terms should also include details of this and how the service charge is to work.
The Heads of Terms should specify whether the tenant will be permitted to assign, sublet, charge or share occupation with a group company and, if so, what conditions are attached to such assignments, sub-lettings, charging or group sharing.
Other terms that lawyers would expect to see covered in the HOT include the following:
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