Top tips for tenants when negotiating Heads of Terms

By Jonathan Clays, Associate Solicitor – Commercial Law

Now that you have found a commercial property to rent it is time for the key terms of the proposed lease to be agreed with the landlord, or their agent, and set out in a document known as the Heads of Terms (“HoTs”). The following are some points that should be considered when agreeing these Heads of Terms:

1.Subject to Contract – whilst the HoTs are intended to set out the key terms they are not intended to be binding on the parties. The HoTs and any correspondence in relation to the proposed letting should be clearly headed ‘Subject to Contract’.

2. Sufficient Detail – whilst neither the landlord nor you will want to spend significant time negotiating the HoTs, the key terms of the proposed letting should be clearly set out in the HoTs;

3. Key Terms – the following are terms that are often included in HoTs:

a. Property – the exact extent of the property to be let, and any parking rights, should be agreed at an early stage (preferably shown on a plan).

b. Break Right(s) – without a formal break right you cannot bring the lease to an end early without the agreement of the landlord (which they may not agree to or may require payment of a sum of money for). Break rights can either be on fixed dates or on a “rolling” basis throughout the term with a set period of notice to be given in each case.

c. Rent – what is the annual rent and how often is this to be paid (usually quarterly or monthly in advance). Such rent will be exclusive of VAT and whether VAT is payable should be checked.

d. Rent-Free Period – are you to have the benefit of a rent-free period (for example to allow fitting-out of the Property before you can open for trade).

e. Rent Review –the landlord may require the ability for the rent to be reviewed at set periods (but usually only where the lease is for more than five years). Whilst this is usually by way of an upwards-only review to the level of the market rent on an agreed date (or dates) there are alternatives. For example, it could be agreed that any increase be linked to an index (e.g., the Retail Prices Index (RPI)) with the advantage that the increase is easily determined and could save professional costs establishing the market rent;

f. Repair – often HoTs will refer to the tenant having a full repairing liability. In this case you would be obliged to put the property into repair (even if not in repair when you take the lease). If the property is in disrepair (and you should instruct a surveyor at an early stage to determine this) you should strongly consider having your repairing obligation limited to keeping the property in the same state as when you entered into the lease. This is usually evidenced by a Photographic Schedule of Condition.

g. Service Charge – if the property forms part of a larger building it is usual for the landlord to recover a percentage of costs they incur for maintaining, repairing, cleaning, etc, the building through a service charge. Details of any service charge (including any recent service charge accounts) should be obtained. In addition, to avoid having to contribute towards costly repairs you should consider whether there is to be a cap on the service charge in any year.

h. Security – the landlord may require you to provide either a guarantor and/or rent deposit. You should consider if this request is reasonable. If it is, then each have their advantages and disadvantages (with a guarantor being personally liable for all liabilities of the tenant and a rent deposit possibly impacting cashflow with a sum being tied up for some or all of the term of the lease).

i. Permitted Use – the permitted use of the property and the ability to change this (subject to being permitted under planning laws) should be clearly set out.

j. Assignment and Underletting – are you to be allowed to assign (transfer) the lease or underlet (grant a lease for a shorter term)? If you are this will usually be with the landlord’s consent (not to be unreasonably withheld or delayed).

k. Security of tenure – is the lease to have security of tenure (often referred to as being ‘inside the 1954 Act’ and so that you are entitled to a new lease at the end of the term) or not? If not, then it would be entirely up to the landlord if they wish to offer you a new lease at the end of the term and they would have full discretion as to the terms of any such lease.

l. Landlord’s Works – are there any works the landlord is required to carry out?

4. Professional Valuation Advice – you should strongly consider obtaining professional advice from a surveyor or property agent on the terms to be agreed (including the Key Terms set out above).

5. (And finally, but not least) Instruct a solicitor – serious consideration should be given to instructing a solicitor at an early stage not only to advise on the draft HoTs but also to avoid any delays once HoTs are agreed. A solicitor can also assist by confirming whether Stamp Duty Land Tax is payable (and the amount) as well confirming other likely costs such a Land Registry Registration Fees and other costs payable to third parties.

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