Understanding ‘Heads of Terms’
Typically in lease negotiations, the first stage will be for the Landlord’s agent to agree ‘Heads of Terms’ with the Tenant. Heads of Terms are intended to be a list of the key points that have been agreed between the parties and when the Landlord’s solicitors draft the Lease itself it will be based on the points listed in the Heads of Terms.
Unsurprisingly, Heads of Terms written by a Landlord’s agent are more likely to favour the Landlord, meaning prospective Tenants should consider seeking legal advice as soon as they receive draft Heads of Terms for approval.
Heads of Terms may contain technical points and Tenants may not fully appreciate the legal and practical implications of agreeing to certain provisions; the good news is that, for Tenants who pick up on the relevant issues early enough, there is usually some scope to negotiate.
Watch out for conditional break clause wording
For instance, we have recently highlighted how strictly a Court will interpret conditions attached to break clauses.Most first draft Heads of Terms will refer to break clauses being subject to conditions, and some will actually set out a list of the proposed conditions.
If the Tenant, thinking this is the norm, agrees at Heads of Terms stage to a conditional break clause, they will likely find it more difficult to change their position later in the negotiations.
Once Heads of Terms have been agreed, Tenants may feel more committed to the proposed Lease and may end up feeling like they have to accept something which they might not otherwise have been comfortable with; this is particularly true if by the time the draft Lease has been prepared the Tenant has incurred other costs such as searches, legal fees and costs in connection with moving equipment, transferring contact details etc. on the strength of having agreed Heads of Terms.
Tenants – ask for legal advice before agreeing anything!
The preferable approach would be to seek legal advice at the earliest possible stage so as to gain a better understanding of the nature of the terms on offer. This should ensure that a Tenant is in a position to make a better-informed judgment as to whether to proceed with a transaction, without the same level of pressure on costs/timescales.
As well as securing more favourable Lease terms, early legal advice can help minimise the need to renegotiate provisions later in the day, which can help save legal costs in the long run.
At Tallents we strongly advise that obtaining advice before agreeing the Heads of Terms is very important for Tenants, particularly those who are inexperienced in Lease negotiations.
FREE legal advice for tenants*
With that in mind we are offering a FREE half hour appointment* for prospective Tenants to discuss draft Heads of Terms before agreeing to them.
We hope that an initial discussion with an experienced commercial lawyer should ensure that Tenants are in the best possible position to go into leases with their eyes open to any potential issues, hopefully securing the best possible outcome and minimising any unnecessary costs as a result.
Landlords – early legal advice will minimise delays
For Landlords too it can be advantageous to seek advice early in the process. There may be legal issues regarding a property which can be resolved quickly and at minimal cost at the outset but which might make a property easier to let and could minimise any delays to lease transactions.
For instance, certain Leases to previous occupiers will have been noted against a Landlord’s Land Registry title to a property. Land Registry do not automatically remove reference to expired leases on the lease expiry date, meaning that old leases may still appear within the Land Registry details even if they came to an end some time ago, which means it may look as though the property is still occupied by a previous tenant.
In that scenario, a prospective Tenant may well be advised not to enter into the new Lease until the notice of the old Lease has been removed at the Land Registry. If this has not been done in advance then it can introduce delay into the lease negotiations whilst the Landlord’s solicitors make the necessary application to the Land Registry.
It will almost always be preferable for the Landlord to have dealt with this kind of issue in advance so as to smooth the way towards a timely completion of the Lease – the chances are that the issue would need to be dealt with before completion anyway so it makes sense to do so sooner rather than later in order to minimise any adverse impact on lease negotiations.
Commercial lease advice from Tallents
Tallents’ commercial property department has experience in advising both Landlords and Tenants regarding all aspects of commercial lease negotiations and the Landlord and Tenant relationship. In the event of a dispute then our specialist litigation solicitors can help guide clients through the process.
For more information please contact our Commercial Law department.