As lockdowns begin to be eased and businesses return to workplaces, there will undoubtedly be many occupiers seeking renegotiation of their existing lease terms, or new leases that redefine their terms.
It is therefore likely that many surveyors will be much busier than during the pandemic and keen to get deals done to help kick-start the property market. This will result in a lot of pressure to push deals through quickly; but ironically this is the moment that surveyors need to slow down and consider what is included in heads of terms. Taking time to do so early in the negotiation will save time later.
Typically – when negotiating a deal for new space in central London for instance – we as commercial property lawyers might receive an email from the surveyor saying: 'Heads of terms seem fine to me on first review, but we now need to push on.'
However, discovering more about the property online, thinking through the transaction as a whole and how we would ideally frame it for the client to achieve their objectives, we typically return the heads of terms to the client and the surveyor with a list of points for them to investigate further.
By this stage, the client has usually moved on and is focusing on getting the deal done on time, to fulfil their own requirements, while the surveyor running the deal might assume we are slowing things down. But being able to perfect the heads of terms at an early stage is important, particularly when the time frame in which to exchange is very tight.
Heads of terms should provide the framework for the deal and cover how it should be executed. But although they do provide a written record of the deal's main terms, they have traditionally been resolved before solicitors are involved, which can cause problems and delays later on. When heads of terms are drafted without advice from an experienced real-estate lawyer, lack of detail may result in a long list of questions to answer before the deal can be completed, wasting time as the parties go back and forth on the terms agreed.
By looking at the heads of terms more deeply at the start, they can be more closely aligned with the client's requirements, which will undoubtedly save time later. It may also be harder to introduce a new term after the heads of terms have been agreed.
In general, heads of terms include points such as the price of the deal, the identities of the parties involved, the basic purpose of the contract, the terms of the contract or transaction, confidentiality agreements and any protection for the parties should the transaction not proceed.
Ensuring the heads of terms are not legally binding is a vital aspect of drafting them, since the detailed provisions will be included in the contract documentation. Using the phrase 'subject to contract' will help ensure they do not become binding.
In many cases, however, the actions of the parties after the heads of terms are drawn up will have as much impact on whether the provisions are seen as being legally binding as the actual wording of those provisions.
For example, should the parties start to fulfil the obligations set out in the heads of terms before a legally binding contract has been finalised, the act of doing so may itself be taken as indicating that these obligations are accepted as being legally binding.
Once the heads of terms have been agreed they become a valuable benchmark for measuring progress of the deal. They can be changed as the details of the negotiation emerge, but these should be reflected in the documentation itself.
Heads of terms will become increasingly important in commercial property deals as they provide the framework for the efficient and successful execution of deals. It is therefore important to understand the benefits of engaging specialist legal advisers at the outset.
Related competencies include: Leasing and letting
BUILT ENVIRONMENT JOURNAL
Jen Lemen FRICS 28 March 2023
Tarrant Parsons 24 March 2023
Mike Appleby 22 March 2023