The purpose of Heads of Terms (HoTs) is to record the principal points of a deal before the final details and small print of a contract are drafted and negotiated by solicitors. For the most part, surveyors negotiate the HoTs on behalf of clients, although solicitors may become involved in lengthy transactions or in instances where a client does not instruct a surveyor.
Basic HoTs for a Lease
HoTs for a new lease should, at minimum, set out the:
- parties i.e. landlord, tenant and any guarantor
- property to be let
- annual rent, and any provision for it to be reviewed
It is also useful to include the details of the solicitors involved, so that the respective solicitors can contact one another without pestering the surveyor or client for these details.
The property to be let might be a simple address or it may involve part of a larger property, in which case providing the solicitor with plans is helpful.
Rent might be a straightforward agreed annual rental figure for the whole duration (if the lease is relatively short) or there might be a review of rent (usually upwards only) at specified dates, whether to open market rent or based on RPI increases – or the whole or part of the rent might be a percentage of the turnover from the tenant’s business at the property. The HoTs should also state any rent free period that is to apply.
As to duration, the HoTs should mention any break option that can be exercised by the landlord or tenant or both and any tenant option to extend the duration. Additional points that might be covered in HoTs are:
- repair and decoration obligations
- service charge obligations
- insurance obligations
- alteration obligations
- user obligations
- conditions for alienation or assignment
Why have Heads of Terms?
Ask a client what they want from a transaction and often the answer is for it to be as quick and painless as possible. Well-drafted HoTs help the involved professionals to deliver that result.
HoTs help to focus the minds of both the landlord and tenant, forcing them to address the key issues at the outset. They also clear up any points of confusion that may arise. Writing down the main points means that misunderstandings in what was agreed can be identified and resolved before detailed drafting begins.
However there is one risk that should be avoided. It is advisable to avoid making HoTs binding. Although they are rarely legally binding, the Courts have been known to interpret them as such in instances where the parties conduct suggests they have entered into a legal agreement.
HoTs should speed up the transaction and provide all parties with a suitable outcome to the leasing process. Leases are binding contracts and they are the most significant financial commitment a business can make. Solicitors and surveyors alike want to ensure the transaction runs as smoothly as possible.
Rob Cooke is a director of Lupton Fawcett specialising in property disputes.
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