What are heads of terms?
Heads of terms are the headline terms that reflect the deal reached between the landlord and tenant so that the lease can be prepared. The heads of terms are usually prepared by an agent acting on behalf of the landlord and will be specific to each lease and property.
Why use heads of terms?
Whether you are a tenant entering into a lease or a landlord granting a lease, agreeing heads of terms helps to prevent any future misunderstanding and lengthy negotiations about what the lease will contain.
Key terms to be considered
In addition to agreeing the main terms, such as the headline rent or the contractual term, many other points will need to be considered and agreed before the documents can be drafted. These include, but are not limited to:
- Rent reviews: If the rent is to be reviewed during the term, consideration needs to be given as to how often this occurs and whether the review will be based on the open market rent at the time of review or on indexes, such as the Retail Price Index.
- Permitted use: It is important to set out what the tenant is permitted to use the property for, for example shop, warehouse, offices etc, at the outset.
- Repair: The heads of terms should set out whether the tenant is required to keep the property in full repair, whether the obligation is for the external and internal areas or the internal areas only and whether there is to be a schedule of condition.
- Assignment and underletting: Depending on how long the lease will run, the landlord may allow the tenant to assign or underlet the property. An assignment provides the tenant with the ability to transfer the lease to another party. An underlease allows another party to use the property, but the tenant is still responsible for the property under the headlease.
- Break clauses: Is there an intention to have a break clause inserted in the lease? If so, the heads of terms should set out whether this will be for the benefit of the tenant, landlord or both. Any conditions required to break the lease should also be considered.
- Rent concessions: If there is to be a rent-free period or any other rent concessions, this should be included in the heads of terms.
- Security of tenure: Business leases have an automatic right of renewal under the Landlord and Tenant Act 1954, but this is often excluded in shorter term leases to allow a landlord more flexibility. The heads of terms should set out whether the tenant is due to benefit from this right, or whether it is due to be excluded.
- Additional rights: Consideration should be given to whether there is a need for any rights over estate roads/footpaths, rights for parking or rights for emergency exit routes required in relation to neighbouring land.
Heads of terms also often refer to other important clauses in the lease, such as insurance provisions and obligations in relation to any relevant service charges amongst others.
How much information should be included in heads of terms?
Heads of terms can contain varying levels of information and will generally depend on the size of the property transaction and the parties involved. If drawn up by an agent, they will usually be more detailed.
It is important to remember that heads of terms are not legally binding. They are used to show the intent of the parties. Landlords and tenants can still change their mind, negotiate the terms, or withdraw from the transaction after entering into these. As previously mentioned, however, agreeing and providing detailed heads of terms at the outset is likely to lead to a smoother transaction for all parties involved.