Heads of Terms
“I’m only leasing it, not buying it!” cry many prospective tenants, faced with having the details of a weighty lease explained to them.
Heads of terms set out the basic commercial terms between parties. Once agreed, it can be exceedingly difficult to seek to re-negotiate a term which had previously been agreed at heads of terms stage. It is important not to commit anything to writing or agree heads of terms without detailed advice from a specialist commercial property lawyer.
What kinds of issues are covered within Heads of Terms?
Security of Tenure
If not ‘contracted out’, the tenant can stay on at the end of the term and must be granted a new lease unless the landlord succeeds in ending the lease on one of the grounds set out in the Landlord and Tenant Act.
Length of term
The term should be fixed for a set period but can the landlord or the tenant terminate the lease early? If so, on what grounds or in what circumstances? Is the tenant to have a right to extend the lease? This may have stamp duty land tax (SDLT) benefits.
Rent free periods
Is there to be a rent free period? This is traditionally to cover the cost to the new tenant of fitting out the new premises. Sometimes the rent free period is extended as an incentive to induce the tenant to take the lease at the rent required.
The Heads of Terms should specify if the rent is to be reviewed, how frequently and upon what basis. Traditionally rent is reviewed every 3 or 5 years and to the higher of open market levels at the review date and the rent payable immediately before the review. The tenant can encounter SDLTproblems if the rent is reviewed more frequently than every 5 years. However, with average lease lengths shortening every year, more landlords are looking at annual rent increases or every 3 years in each case tied to rises in the Retail Price Index.
A tenant will want to be able to sell or assign the lease, or sub-let the whole or part of the premises. For subletting, the landlord can apply to the original tenant for rent if the sub-tenant defaults. If assignment is permitted, however, it is wise to insist on “an authorised guarantee agreement”.
Most landlords do not allow alterations that affect the structure or exterior of the building but should permit other alterations provided they have been approved by them beforehand.
Repair and maintenance
Responsibility for repair depends upon whether the lease covers a whole building or part. If it is the whole building, usually the tenant will carry out repairs. If, however, only part of the building is let, the landlord should specifically be made responsible for the repair and maintenance of the structure of the building and any common parts.
User clauses in leases are usually drafted in the negative form, effectively preventing any use other than that specified.
Forewarned is forearmed
If a landlord takes account of these points when negotiating heads of terms with a new tenant, his solicitors will be able to prepare a lease quickly. Remember, however, to ensure that Heads of Terms are clearly expressed to be ‘subject to contract’.
For further information or advice, please contact Richard Freeman-Wallace, Commercial Property Partner at Hay & Kilner.
Call: 0191 232 8345