You have just fulfilled a long-held ambition, secured the necessary funding, and found the dream location for your business.
Your prospective landlord has provided you with the heads of terms for a lease and then suddenly you are overcome with worry and anxious about what to do next.
The first thing to do, is not to panic and the second thing is not to rush into agreeing to the heads of terms without fully understanding what they mean.
It is important to understand that by entering a lease, you are creating a long-term business relationship, and it is always best to try to maintain this relationship on good terms. The best way to do this is to take time to negotiate reasonable terms for both parties.
It is, therefore, essential to understand what the heads of terms are, how they can impact you and how to effectively negotiate them to achieve the best business deal.
What are Heads of terms
The heads of terms set out the fundamental terms of a commercial agreement between both parties and in a lease, the terms are generally negotiable between the landlord and the tenant.
The Heads of Terms are the foundation on which a lease is drafted. When correctly drafted, the head of terms are generally not legally binding, however, there can be occasions on which it is agreed that they will be legally binding.
Careful consideration needs to be taken when drafting and agreeing the Heads of Terms, to ensure your ability to negotiate as a Tenant is not compromised, as there is a moral implication to complete the transaction based on the agreed terms.
The purpose of the Heads of Terms
The Heads of Terms help both parties understand each other’s objectives at the outset of the transaction, and it is important to have these agreed before entering more specific negotiations.
The main terms which should be agreed in a lease generally include:
- The identities and contact information of each party;
- Key commercial conditions including the nature of the transaction, purchase price, payment terms, lease term and delivery structure;
- Whether it is an excluded or protected lease;
- Will it include a break clause and rent review,
- Will it allow for assignments, subletting and sharing of the property;
- Will any service charges, insurance and other regular outgoings apply under the lease;
- Provisions for alterations, repair responsibilities and decoration; and
- Any other special conditions.
You may have been offered heads of terms that are very brief and completely silent on many of the important issues outlined above, your solicitor will be able to assist you with identifying what should be agreed and how best to negotiate this in order to avoid any future misunderstandings.
What steps do I need to take, before I enter a lease?
As a prospective tenant it is common to feel under pressure to reach an agreement on certain elements of a commercial lease.
It may also be tempting to agree to a proposed list of terms straightaway, especially if the landlord is putting you under pressure to act quickly to secure the property.
Before doing so, it is important to seek legal advice from an experienced commercial property solicitor.
Your solicitor will help you understand what each term means, its legal implications and highlight any possible risks associated with such terms.
Failure to do obtain legal advice, can often result in important considerations being overlooked, unfair and detrimental provisions being agreed, and a lease which could cause you serious financial and practical problems in the future.
What do I need to consider?
A solicitor can help you put together a deal that is right for you by taking into account:
- The age of the property;
- The condition of the property and what you might have to do to make it decent and usable;
- Your current and future plans for the property and
- Your financial expectations in terms of rent, service charges and insurance premiums and excesses.
A solicitor can evaluate the feasibility of your priorities and liaise with the landlord’s agent to draw up a set of heads of terms that are fair to both parties.
Final thoughts
The heads of terms will briefly set out the key terms of your proposed lease. Leases can be complex, and it is important to get them right at the start, otherwise you risk wasting time, energy and money dealing with any necessary changes in the future.
Our commercial property specialists can help you negotiate and agree heads of terms. For more information, please get in touch.