Negotiating a commercial lease can be a long-drawn-out process however, it is often not helped by protracted emails back and forth over issues which could have been dealt with right at the start. This blog sets out some key pointers to improving your Heads of Terms and speeding up the process towards completion.
1. Remember the purpose
The purpose of Heads of Terms is to allow parties to understand the overall scope of a transaction and to deal with the key points head-on before significant legal costs are incurred. By identifying the key issues at the start, this will help to avoid lengthy exchanges of correspondence and documentation.
2. Get the plan ready
Too often the lease plan is not provided until the drafting of the lease has commenced. This can lead to confusion and uncertainty over the extent of the premises to be let to the tenant. By having a plan available at the outset, unnecessary delays can be avoided later down the line, with the tenant’s solicitor able to carry out their searches from the get-go, and the finalised documents can be engrossed without having to wait for the plan to be annexed.
3. Break out the break conditions
Whilst a Heads of Terms may set out that a tenant may bring the lease to an end on the X anniversary of the commencement of the lease upon giving Y months’ notice, there is often no reference to what the break conditions are going to be. This can be a key negotiation point between both sides. It is useful to set out some of the headline break conditions in the Heads of Terms, such as the tenant returning the property free of occupation, and that the tenant has paid all of their rents and any other sums due.
4. Establish the third parties
If you are aware that a third party is going to be involved in the transaction, make sure that this is highlighted in the Heads of Terms. If there is involvement of a lender or a superior landlord, it is best if parties are aware of this at the outset. If consents are required, it is best to agree who will be responsible for any associated costs before negotiations are under way.
5. Realise the rates
It is common practice for the tenant to be responsible for the business rates due on commercial premises. The tenant may seek to claim this back as relief if they vacate the premises at any point. If the tenant does claim relief, this may prevent the landlord from being able to claim it themselves at the end of the lease term. The lease may provide that the tenant indemnifies the landlord against any relief already claimed. This is often a key point of negotiation as the tenant will want to resist an indemnity, whilst the landlord will not want forgo any rate savings. It is useful if parties can come to an agreement on this at the outset.
6. Work out repair
Generally speaking, it is the tenant who is obliged under the lease to carry out the necessary repairs to a property by keeping it in “good and substantial repair and condition”. The Heads of Terms should establish exactly what this obligation involves and whether a schedule of condition is going to be needed.
7. Set out underlease and assignment
It is helpful if the Heads of Terms can address the key conditions to be contained in the lease. With the underlease conditions, is the underlease rent going to be set at an open market rental value or is it going to be the passing rent under the lease? With assignment, will the lease contain the standard conditions and provide for an Authorised Guarantee Agreement? Setting the stall with these key conditions will smooth out negotiations and alert the other side to any diversions from standard form conditions.
8. Alterations
Often the tenant will need to carry out fit out works. It is important to establish that the landlord consents to these in principle and who is to pay the costs of any superior landlord in relation to these. Full specifications and plans detailing the proposed works should ideally be annexed to the Heads of Terms.
From the tenant’s point of view, a rent free period whilst the works are being carried out would be preferable and now is the time to negotiate this.
9. Not too short, not too long
Remember that the whole point of Heads of Terms is to do exactly what it says on the tin. Very short Heads of Terms which only cover the very basics, such as the parties, the property, the term, and the rent, will only lead to lengthy and costly negotiations between solicitors. On the other hand, exceptionally lengthy Heads of Terms can cause delays. There is little point in both sides applying a fine toothcomb to matters which could quite easily wait until the drafting of the lease.
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