The Commercial Property Department at Girlings LLP receive enquiries from clients acting as a landlord looking to grant a lease or a tenant looking to take a lease, whereby, an agreement has been reached between the parties and no agent is involved to assist in agreeing the terms. The parties will have invariably agreed the most important terms –the yearly rent and the length of the lease. There is so much more that, we would say, should be agreed at the outset, before solicitors are instructed.
Heads of Terms in relation to leases of commercial property are, essentially, a short document formalising what has been agreed between the landlord and the tenant. Typically, the document will only run to 2-3 pages and is formatted in such a way as to have a heading, being the term, with the agreed position set out in a short paragraph, in text, and it doesn’t (and, indeed, shouldn’t!) be any more than that. For those that think it is tantamount to a duplication of work, that is, of the contract or lease, then the Heads of Terms have become too long! They should not extend beyond a summary of the main commercial points agreed and any detail that crosses over with legal points should be checked with a solicitor before final agreement.
On the sale of a property, whether it be a freehold or a leasehold, as a minimum, the heads of terms should contain reference to the purchase price, whether VAT is payable on that purchase price and the full extent of the property being sold, with reference to Land Registry titles, ideally. If the property being sold is part of the seller’s building or land, there should also be reference to any rights that the seller will need over the property being sold or any rights that the buyer will need over the rest of the seller’s property and a plan should be attached to the Heads of Terms showing the part being sold, in relation to the whole of what the seller owns.
As to when a new lease is being granted, you should expect to have more extensive - not to be confused with more detailed - Heads of Terms. Yes, the main commercial points for the parties to consider here are, more obviously, the annual rent and the length of the lease but, again, the full extent of the property being let is required, with a plan attached where it is a letting of part of the landlord’s title with a reference to rights needed by the landlord over the property and by the tenant over the landlord’s retained part, and also, whether the tenant will benefit from a ‘protected tenancy’ being a statutory right to renew the lease at the end of the term. In addition, the repair obligation, alterations that can be carried out, the extent of the tenant’s ability to transfer the lease (and if so, the requirement to guarantee the incoming tenant) or sub-let the lease and the use of the property that the landlord is willing to permit under the lease, are all important terms that should be set out in the document.
Will the landlord require guarantors or a rent deposit, if so, how much? Will the annual rent be reviewed at set points during the lease, if so, how often and will it be to the market rent or by reference to a formula that is index linked? Will either party have a right to break the lease during the term and, if so, when and what conditions will be attached to it? This is also the place to add any terms that are particular to the transaction – if the deal is conditional on something happening, such as board approval or planning permission being granted or getting a consent from a third party or the results of a survey and inspection. If there is a specific timeframe in which it has to be done because of e.g. the market or the Budget or tax or financial reasons then, again, it is important to insert these drivers into Heads of Terms so that everyone can be clear on what the expectation is.
It should be made absolutely clear, however, that Heads of Terms are not legally binding, in other words, you cannot sue the other party for any breach of an agreed term as set out in the document. It is absolutely vital that this is the case, as otherwise, it would diminish the value of them. All Heads of Terms should specifically state that they are not intended to be legally binding and that they are subject to contract so that it is unequivocal that they cannot be construed as forming the actual contract itself. Jumping ahead, the contract or lease should also contain a provision that any pre-contract statements or informal pre-contract replies to enquiries are expressly excluded as this will include anything stated in the Heads of Terms, as things change as a transaction progresses.
The advantages of setting these commercial points out in Heads of Terms are numerous. They serve to provide a holistic view of the transaction and they record the fundamental commercial points that have been discussed and agreed by the parties who will have had to assess their respective commercial requirements, which is a good focus to have at the beginning of a transaction. To ‘flush out’ any issues the other party has, which may not have occurred to you, allows for a bit of bargaining power. A natural consequence of that is conceding one point in favour of achieving agreement on another which will give you a balanced set of terms that you can be happy with. A huge plus is that the solicitor should not, then, incur unnecessary costs in settling these commercial points on your behalf which will, inevitably, also delay completion of the transaction which is always desirable! And from a practitioner’s point of view, it will also prevent any misunderstanding.
The generally accepted view amongst property professionals is that having Heads of Terms is better than not, in fact, the Royal Institute of Chartered Surveyors (RICS) have created a Lease Code (2020) which sets out best practice for agents or landlords regulated by RICS and sets out mandatory requirements when agreeing terms, for example, Heads of Terms for a lease of vacant premises have to be in writing and must contain certain wording. Whilst it does not go as far as to detail the terms, it does set out what they would expect to see. Having said that, it is not mandatory that Heads of Terms are prepared by a chartered surveyor. They can be prepared by you, as the individual, or an agent, and a solicitor can advise on them as they are being formulated. The general convention is that they are prepared by the seller or the landlord and should be signed by someone authorised to do so.
It is clear that having Heads of Terms prepared is a no brainer! The Commercial Property Department at Girlings LLP are happy to advise on and assist with the preparation of these, once a tenant or buyer has been found, which will, we hope, pave the way for a smoother and more efficient property transaction.