Posted on 16 January 2023
How to price? That’s the topic of the latest instalment of my “A to B” Series on Heads of Terms. Anyone doing any sort of property deal (or other deal) will find this Series useful. If you want to know more, a good place to start is my first article What are HOTs? which will give you an overview of Heads of Terms and what they should contain. Later blogs dive into more detail on things to think about when agreeing terms. The most important term of all is price, and that is why today’s article is dedicated to exploring price in more detail.
How to price?
If you are buying or leasing, make sure you don’t overpay on purchase price, or rent. This is critical to making your new property worthwhile, and your business profitable. Equally, if you are a seller or landlord, make sure you don’t undersell your asset. Make it work harder for you by getting the best price you can. I often recommend that clients take expert on advice on what price to pay, or what rent is reasonable, by speaking with a qualified valuer. If you are in the West Midlands I have good contacts with a number of local firms and in the East Midlands too. If you give me a call on 01384 872069 I can point you in the right direction. Further afield? A good place to start is the RICS Find a Surveyor tool.
Deal or no deal?
Price is a critical commercial term. It’s one of the first things normally advertised when the property is marketed. When a deal is done, it’s obviously a very important term of the deal. You would be surprised therefore how often I see Heads of Terms where there is ambiguity in the price. I have seen “deals” where that ambiguity is misunderstood by both sides so differently, that actually there is no “deal” at all.
When you are agreeing Heads of Terms, it may sound obvious, but make sure that you actually agreed on the price or the rent. There is no point instructing solicitors, issuing searches or having surveys, all of which cost you money, if actually the deal isn’t what you thought it was. If you are not sure how to prepare Heads of Terms just drop me a line via firstname.lastname@example.org or on 01384 872069 or via my Free Enquiry Form and I can help out.
How not to price?
Things to avoid are:
- Expressing the price by way of a formula per square foot or metre. E.g. if you have agreed a price per square foot, that’s fine – but do the maths and agree the number that results. Make sure both sides are happy with that.
- Expressing a headline price, and then noting some sort of discount to account for certain circumstances/conditions. Again, that’s fine, but my advice is to again do the maths. Get a number out the other end, and put that in the HOTs.
- Not having Heads of Terms at all. Email correspondence can go backwards and forwards while you negotiate. That’s fine. When you’ve agreed terms though, crystallise them in a Heads of Agreement document.
- Not detailing key terms, like price, in the HOTs. Don’t be tempted to refer to a draft legal agreement or something detailed like that to define the price. Work it out and put it front and centre in the HOTs.
Why is this important?
Obvious really – it saves time, cost, and ultimately makes sure you actually have a deal.
I’ve had one deal recently where a formula had been agreed. However, in the HOTs, the Buyer had incorrectly calculated the agreed % discount from the purchase price. I pointed this out, and the Seller then incorrectly calculated it to a different price. Then, there was debate as to whether some pre-payments had been made, and there was uncertainty as to whether these would be included in the discount, or be taken off first. The only way to avoid this sort of confusion (which causes additional costs and delay) is to crunch the numbers.
If the price is right
I had another deal where there were no Heads of Terms. Lawyers were instructed by the seller and had dived into drafting a Lease and various other documents. The transaction was worth millions of pounds, and was time critical, and the temptation is to “dive in”. However, my first advice to clients is always to prepare HOTs, so that everyone knows what the deal is. If the deal is clear, then the legal work is smooth and straightforward. If there is no clear deal, the lawyers waste thousands of pounds going round in circles on extensive and detailed drafting, that may or may not be what the parties intend. I don’t like to waste my client’s money, so always strongly recommend a set of terms of agreement be drawn up.
The seller eventually prepared HOTs, but they referred on price to a complex draft commercial legal agreement. I recommended that the “principle” on the price was extracted from the draft agreement, and put in the Heads of Terms. After many emails, phone calls, and even Teams meetings, this eventually happened. It became apparent that there was a gulf of expectation on this most critical of commercial terms between the parties, and the deal aborted. We saved our client months of time, and tens of thousands of pounds of legal costs by establishing this as soon as we could. The seller must have wasted many thousands of pounds drafting legal documents for a deal that never was.
Don’t waste your money – get the price right.
As always, if you have any queries, then do get in touch for a no-obligation, free, quotation via email@example.com or on 01384 872069 or via my Free Enquiry Form or Live Chat. I carry out all work through Nexa Law Limited, which is authorised and regulated by the SRA.
Thanks for reading my above article, and I look forward to seeing you on the next blog post!
Finally, the above article is for general information purposes only. I am not providing legal advice in the above and it may or may not be appropriate for your specific circumstances. If you require legal advice, please do get in touch and I will be delighted to assist.