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What are commercial heads of terms?

What are commercial heads of terms?

Heads of terms is a document that records the main terms of a lease agreement between a landlord and a tenant. The terms are usually prepared and negotiated by the landlord’s agent. Although heads of terms are not legally binding, it is important for the tenant to take time to understand the terms and the financial implications behind those terms before they start lease negotiations.

There are a number of key terms that the parties will need to agree, including the following:

Rent – A tenant’s financial liability often extends beyond paying annual rent under the lease. It is also common for the tenant to be liable for a landlord’s insurance costs, business rates, service charges, utilities and VAT.

Term – Business leases usually benefit from the security of tenure provisions of the Landlord and Tenant Act 1954. If the lease is protected by the Act, the tenant has an automatic right to renew their lease on the same or similar terms when their current lease expires, unless the landlord can show that there are grounds to refuse a renewal which are limited and set out in the Act.  However, if the lease is excluded from the Act, unless a renewal is agreed with the landlord, the tenant will need to vacate the premises when their current lease comes to an end.

Assignment and Underletting – The landlord may allow the tenant to assign or underlet the property depending on the length of the lease. An assignment allows the tenant to transfer the lease to another party whilst an underlease allows another party to use the property, but the tenant will remain liable for the lease obligations.

Permitted Use – The tenant needs to know what the permitted use of the property is to ensure that the use corresponds with the tenant’s business needs.

Repairs –If the tenant has a fully repairing lease, they will need to not only keep the property repaired, but also make good any existing disrepair. Therefore, a tenant should try to limit their obligation to repair to keeping the property in the same condition as the property was in at the start of the lease by agreeing that a schedule of condition evidencing the state of the property is annexed to the lease.

Rent Review – Leases that are longer than 5 years usually contain a rent review clause. This clause allows the landlord to adjust the rent so it is in line with the current market or by reference to Retail Prices Index. Rent reviews are carried out on fixed dates and the most common form of review tends to be a review that is based on an open market rent.

For advice on any of these issues, please contact Agata Marosz in our Commercial Property team.

Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances. 

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