Posted on 10 May 2022
Welcome to the first in my new series of blog posts. I am going to deep dive into one of the most important topics for any commercial property transaction over the coming weeks – Heads of Terms. In this first article, I will look at the question “What are HOTs?”. You will find this “A to B” Series useful if you are a tenant or landlord, a buyer of commercial property, or a seller. 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 will explore Heads of Terms – what they are, what they should contain, and what they mean. My first post will give an overview to HOTs. In later posts, I will look at the important different elements of Heads of Terms. I will explore each in more detail. You may have instructed an agent to negotiate HOTs on your behalf. Or, you may be negotiating them yourself. Either way, you will hopefully find this series useful. I will explode some of the jargon involved. I will help you to make sure you understand what you (or your agents) are signing up to. 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.
For now, let’s start at the start…
What are HOTs?
HOTs stands for Heads of Terms. They are the fundamental commercial terms of agreement in a transaction. They sometimes also called Heads of Agreement or simply “Heads”.
For a sale or purchase, they are usually quite straightforward. They will cover key issues such as:
- Full name and contact details (address, email, and telephone) of the Seller and the Buyer.
- Name, address and post code of the Property.
- Details (name, address, email, and telephone) of the Seller’s and Buyer’s Solicitor.
- Price.
- Target timescale.
- Details of any agreed contents etc to be sold/included.
- Any other material terms, e.g. conditional on planning.
Similarly, for lease transactions you will include the above basic terms. You will then have a host of other terms covering the agreed position on rent, rent deposits, alterations, assignment, underletting, security of tenure and other items. I will explore HOTs for leases in more detail in a later article.
HOTs for Different Transaction Types
Different transaction types will require different Heads of Terms. My website has plenty of information on the different types of property transactions. You can find out more information about yours by clicking the links below:
- Purchasing – Freehold Purchase – McLean Legal – Commercial Property Solicitor ;
- Selling – Freehold Sales – McLean Legal – Commercial Property Solicitor ; and
- Leasing – Leases – McLean Legal – Commercial Property Solicitor .
Key Issue – “Subject to Contract”
You should usually make sure that Heads of Terms are marked “Subject to Contract”. This means that they are subject to formal documentation in a contract, usually to be agreed between the solicitors acting for the Seller and the Buyer (or the Landlord and the Tenant as appropriate), and won’t be binding in themselves. You can also expressly confirm that the Heads of Terms are not intended to be legally binding on the parties.
Why make HOTs “Subject to Contract”?
Essentially, you want to make sure that you do not inadvertently create a binding contract pursuant to Section 2 Law of Property (Miscellaneous Provisions) Act 1989 (legislation.gov.uk) This specifies that a contract for the sale of land (or other interest in land, such a lease) must be in writing, incorporate all of the terms that have been agreed in one document (or exchanged document) and signed by, or on behalf of, each party to the contract. The other fundamentals of a contract must also be present – offer, acceptance, consideration (usually, but not always, money) and intention to create legal relations. Sometimes Heads of Terms can satisfy these requirements, which can have unintended consequences.
Marking HOTs “Subject to Contract” is usually the safest route for ensuring you do not inadvertently create a binding contract. I recommend that the contract (or lease) is negotiated by your solicitor, ensuring that all the appropriate legal provisions are included. Heads of Terms are usually one or two pages for instance, and do not contain all the detail you want in a contract. HOTs are a tool to sketch the main terms only – they are not the right tool to document the contract in full.
Importantly, substantial damages have been awarded in recent cases for breach of inadvertently binding Heads of Terms. I will review these cases in more detail in future blog posts. You don’t want to create such liability by mistake. It is usually safest to mark HOTs “Subject to Contract” or otherwise set out that they are not intended to be legally binding, UNLESS you have an express intention to make certain parts of them binding. If in doubt, consult your solicitor. I’m always happy to discuss legal issues, so contact me on enquiries@mcleanlegal.co.uk or any of my contact details below.
Next Time
In my next blog, I will look at Heads of Terms for Leasehold transactions specifically. They usually contain more detail, so I will explore that further.
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
