Heads of Terms (HOTs) are a summary of the main terms agreed upon by both parties in a commercial property transaction. While HOTs are not legally binding, they serve as a blueprint for the lease, helping to prevent misunderstandings. By establishing clear expectations at the outset, HOTs make the legal drafting process more efficient and reduce the potential for disputes.
HOTs should include the following key components:
The parties: It’s essential to clearly identify the parties involved in the transaction. This includes specifying the full legal names and, if applicable, company registration numbers. If a Special Purpose Vehicle (SPV) is involved, note whether the company has been incorporated or not. This helps avoid delays in identifying the correct entity.
Property description: A full description of the property is critical, including the title number where available. If the transaction involves the sale or lease of part of a property, a plan should be provided. This allows searches to be submitted promptly, helping avoid delays due to missing information.
Lease details: The duration of the lease should be clearly outlined. For renewals, it is important to specify whether the renewal lease starts immediately after the previous lease expires or upon completion. Also, specify any further renewal options, particularly if the lease lacks 1954 Act protection.
Rent and payment terms: The base rent and payment terms should be clearly stated in the HOTs. Rent is typically paid quarterly in advance on traditional quarter days, but if the client has preferred payment dates, these should be noted upfront to prevent surprises during negotiations.
Rent reviews: Rent reviews often become contentious during negotiations. The HOTs should specify the method of review - whether market, stepped, or index-linked - along with the frequency of reviews. Avoid referencing the Retail Price Index (RPI) for rent reviews, as RPI will be reformed by 2030. If caps and collars (limits on rent increases) are to be applied, these should also be addressed.
Additional costs and charges: Clarity on this is essential, for example:
Break clauses: Break clauses can be complex and require careful attention. The conditions under which the break clause can be exercised should be explicitly outlined. This includes whether the payment of rent includes other sums like service charges or insurance contributions. Also, define what constitutes a breach of covenant - whether it’s a breach of all covenants or only specific ones, such as repair obligations.
Another important consideration is vacant possession. While often included as a standard requirement, tenants may seek to soften this clause, so clarity is needed on whether the property must be returned completely vacant in the strictest sense, or simply free of occupation.
Alterations, improvements, and use of the property: The landlord’s consent is typically required for alterations, but it’s important to clarify the circumstances under which consent can or cannot be reasonably withheld. It should also be specified whether tenants are allowed to make changes without the landlord’s consent, and if so, whether they must notify the landlord.
Use clauses should be clearly defined, ideally by reference to use classes. It’s important to consider existing leases within an estate which could contain restrictions on how the rest of the estate is used with non-compete clauses. This is particularly the case with restaurant leases.
Repair obligations should be clearly outlined to avoid confusion. If a lease is fully repairing, tenants should be aware of the property’s condition at the outset. A thorough building survey is essential to ensure that tenants are not left with unexpected repair costs.
Legal and practical considerations: Several additional considerations should be addressed in HOTs:
Heads of Terms are a vital tool in ensuring clarity and efficiency in commercial property transactions. By clearly outlining key terms such as rent, lease duration, break clauses, and repair obligations, HOTs help prevent misunderstandings and streamline the legal drafting process. Additionally, engaging experts like tax advisors and surveyors early on can help avoid delays and ensure the transaction progresses smoothly. Finally, do not forget to consider potential Stamp Duty Land Tax (SDLT) liabilities when budgeting for the lease.