Posted on 17 May 2022
Welcome back to my “A to B” Series on Heads of Terms. Today, I’m going to look in overview at Lease Heads of Terms. You will find this “A to B” Series useful if you are a tenant or landlord. If you are an agent negotiating terms for a client, you may also find it useful to read the Series, as it will give you an insight into the legal implications of the terms you are agreeing for your clients.
What is an “A to B” Series?
This is an “A to B” Series – a series of blog posts exploring a commercial property topic in detail. In this Series I am exploring Heads of Terms – what they are, what they should contain, and what they mean. My post last week gave an overview to HOT’s in general. In later posts, I will look at the important different elements of Heads of Terms. I will explore each in more detail. Today it is the turn of Lease Heads of Terms – again I will give an overview. If you want to find other articles in the Series, please check out my Blog where you will find all current and previous blog posts.
My aim in all property work is to help you to get from “A to B” as simply, and cost-effectively, as possible. If you like what you see here, take a look at my “A to B” Guides – there is currently one available for Selling a Commercial Property, and others are in the pipeline. If you have any queries at any time, do get in touch on for a no-obligation, free, quotation via enquiries@mcleanlegal.co.uk or on 01384 872069 or via my Free Enquiry Form. I carry out all work through Nexa Law Limited. Nexa is authorised and regulated by the SRA.
Lease Heads of Terms – the Basics
I summarised last week the basic terms that you need to include in any HOT’s for a sale or purchase of commercial property. Some of these basic terms will also be included in Lease Heads of Terms:
- Full name and contact details (address, email, and telephone) of the Landlord and the Tenant.
- Name, address and post code of the Property.
- Details (name, address, email, and telephone) of the Landlord’s and the Tenant’s Solicitor.
- Target timescale.
Lease Heads of Terms – Further Detail
Beyond the basic terms mentioned above, Heads of Terms for a rack rented lease transaction will (and should) cover various other terms in greater detail. These are:
Financial Items
Firstly, the Heads of Terms should cover the various financial arrangements between the parties:
- Rent. Details of when this is payable – e.g. quarterly in advance. On what dates?
- Premium. Details of any premium payable on the grant of the lease.
- Rent Commencement. I.e. whether there will be any rent free period?
- Service Charge. Whether there will be a separate service charge, and how this will be calculated.
- Rent Deposit. Whether a rent deposit is to be provided by the tenant, and how much?
- Interest. When it is due, and at what rate?
Lease Terms
Secondly, the Heads of Terms should cover all the things that describe or make up the lease:
- Demise. The extent of the property to be let.
- Term. How long the lease is intended to be for.
- Term Commencement. When the lease will commence?
- Security of Tenure. Details of whether the lease is to have security of tenure, or if it is to be contracted out of the Landlord and Tenant Act 1954.
- Break Clause. Whether there will be a break clause, and whether this will be mutual or landlord/tenant only. Further, whether it is conditional on any items, and the length of notice required.
Key Restrictions
Thirdly, the Heads of Terms should cover the key restrictions that should be placed on the tenant:
- Use. What is the permitted use?
- Alienation. For example, can the lease be assigned (in whole or part, and subject to what conditions)? Can the premises be sublet (and on what terms)? Is group sharing is permitted (where the tenant is a company)?
- Alterations. Details of what alterations are permitted, whether consent is required and what conditions will need to be complied with.
Key Obligations
Finally, the Heads of Terms should cover the key obligations the tenant will be placed under in the lease:
- Repair. Details of the standard of repair that the tenant should be placed under, and any limitations to that (for instance a schedule of condition).
- Decoration. Information on how often the property is to be decorated, and to what standard.
- Outgoings. Whether the tenant is to be responsible for rates, utilities etc, or if these are included in the rent.
- Insurance. Who is to insure? Rent suspension? Reinstatement?
Lease Heads of Terms – Why so Detailed?
As you can see from the above, Heads of Terms for lease transactions can (and usually should) run into some detail. Their detailed nature arises from the nature of a lease transaction. A lease grants a tenant what is called “exclusive possession” of the property being let. This means that the tenant can take possession of the property, and exclude all others from it (including the landlord). The tenant is permitted to carry on any activity with the demised area, and during the term, with limited implied restriction (other than by the general law). For instance, if you don’t restrict alterations – the tenant will be able to alter what they like in the demised area (subject to planning and building regs).
In order to protect the landlord’s interest in the property (which is long term, whereas the tenant’s is usually short term only for a rack rented lease) leases will specify all the restrictions that the tenant is placed under. If they do not spell them out, the tenant may well be free to do as it pleases. This is why Heads of Terms for lease (and then leases themselves) go into more detail – there is simply more ground to cover. If you would like more information on lease transactions now, check out my page on Leases .
And Finally…
I’d like to note as a final point – Heads of Terms do not need to cover every single term off in full. As mentioned in my first blog post, they are a guide to the key commercial terms of the deal. However, it is useful for the solicitor preparing the lease if they are as detailed as possible, as that saves time in going back and forth to take instructions if the terms agreed are too brief. Also – the above list is not exhaustive – you may need to cover other terms.
Next Time
So, in my next blog, I will start to deep dive into some of these specific items within Lease Heads of Terms. Some items will warrant a full blog post each; others will be combined into one blog post. There is plenty more to be explored, so stay tuned!
Contact Me
As always, if you have any queries, then do get in touch for a no-obligation, free, quotation via enquiries@mcleanlegal.co.uk or on 01384 872069 or via my Free Enquiry Form. I carry out all work through Nexa Law Limited, which is authorised and regulated by the SRA.
Check out my LinkedIn profile and Facebook page too.
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.
Thanks
John
