What are they and why are they important?
Heads of Terms – often referred to as HoTs – are used in commercial transactions to set out the main terms of a deal which the lawyers then use to document and ultimately complete the transaction.
In residential transactions this document is more usually referred to as the Memorandum of Sale.
Does a surveyor have to draft the HoTs?
Not necessarily but if a surveyor is involved in a lease transaction they will usually draft the HoTs.
The benefit of a surveyor or agent preparing these terms is that they should cover all the main details negotiated between the landlord and the tenant to close the deal. Although the HoTs are not legally binding, a good set of HoTs does mean there will be less scope for introducing new or different terms at the legal stage which would add to cost and causes delay.
Should lawyers review HoTs?
It’s a good idea to do this if they are not straightforward as this gets the main terms settled which again saves time and cost in the long run.
What should HoTs cover?
This does depend on the transaction but the essentials to cover are :
- Exactly what is being let? Is it part or whole of a building or site? In most cases a plan will be needed for the lease and it’s best to get that done at the HoTs stage. If the lease is to be registered, the plan needs to be Land Registry-compliant which is a topic in itself and will be covered in the next blog.
- Length of term including any break clauses, landlord or tenant triggers. Again this is an important topic and will be covered in a later blog.
- Rent-rent review. How is the rent to be reviewed: market rent, fixed increase, RPI, CPI? Again another topic for a further blog.
- Parties. Details of the landlord, and the tenant guarantor should be clearly set out in full with up-to-date addresses.
- Rent deposit. Is there one? How much? What will trigger its release? How will it be held?
- Assignment and underletting. Will this be allowed and if so will underletting be whole or part?
- Will the tenant have ‘security of tenure’ rights under the Landlord and Tenant Act? Again a topic for another blog.
- Repair and service charge. Full repair, schedule of condition, will there be a service charge? HoTs are the best place to agree this and any cap put in place on service charge.
- Use allowed. What is the tenant’s proposed and permitted use – particularly important for retail.
There is plenty more to discuss. Follow our Commercial Property Explainer blogs and get completely in the know on commercial leases. And if you need expert legal advice in the meantime, call Janine Eaglesfield on 01756 692861 or email email@example.com