PROPERTY JOURNAL

What to look for in negotiating heads of terms

When negotiating a new lease, the significance of the heads of terms should not be neglected. Specialist legal advice can help

Author:

Karen Mason

10 May 2021

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.

Slow is smooth and smooth is fast

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.

Defer the detail

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.

'Ensuring the heads of terms are not legally binding is a vital aspect of drafting them'

Possible provisions

For a lease agreement, these provisions in the heads of terms might include:

details of the property, including the address, whether it is freehold or leasehold, and whether the transaction concerns lease of the whole property or just part of it
the details of any professional advisers working for the parties, such as solicitors, accountants or agents
the parties involved in the transaction, including any guarantor required, with names, contact details and whether the property is being let to a limited company or an individual
the length of any proposed lease term
the level of any security of tenure being proposed, particularly whether any lease will be covered by the Landlord and Tenant Act 1954
whether any lease will include a break clause and, if so, whether there will be conditions to trigger it
the amount, frequency and payment method of any rent being paid
the frequency of and method for any rent reviews
the length of any rent-free period while the tenant is fitting out the property before formal occupation
the amount of any other incentives to take the lease, if any
whether a rent deposit is payable and, if so, how much and when it will be reimbursed
which party is responsible for paying building insurance and whether it is included as part of the rent
the purpose for which the property can be used, and whether the tenant can change that use in future
whether the tenant is allowed to sublet the property or assign the lease to a third party
whether each party is responsible for their own costs or one of them has agreed to meet the costs of all parties
whether the tenant is permitted to carry out alterations
a timescale detailing how long the transaction is expected to take
a target completion date, to stop further negotiations becoming protracted.

Benchmark and benefits

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.

Karen Mason is a commercial property lawyer and co-founder of Newmanor Law
Contact Karen: Email

Related competencies include: Leasing and letting

RICS Code for leasing business premises, 1st edition