Leases - Negotiating Heads of Terms
This is the first in a series of articles exploring some of the key issues to be considered when agreeing heads of terms and negotiating the provisions of a commercial lease.
Historically leases have been extremely landlord friendly with tenants having to accept onerous lease provisions, however over the last 10-15 years leases have become far more balanced between the parties. This is beneficial for tenants but it can lead to extended negotiation over lease provisions especially where landlords are using outdated precedent leases.
The Process of Negotiating Heads of Terms
Before the lease drafting or negotiation has even commenced the respective parties' agents will generally negotiate heads of terms setting out the basis for the lease. It is advisable for the solicitor to be involved at this stage of the transaction and to review and comment on the draft form of heads of terms as they can ensure all the key points have been covered. The finer points of the lease provisions can be left to the solicitors to negotiate but having balanced and clear heads of terms which are satisfactory to each party is crucial in ensuring that each matter progresses smoothly and quickly. Whilst the heads of terms are generally stated to be subject to contract it can cause difficulties later down the line if a party wishes to depart from any provision of the heads of terms.
New Code for Leasing Business Premises
The Royal Institution of Chartered Surveyors (RICS) published its latest Code for leasing business premises in February 2020 (2020 Code) replacing its 2007 Code for leasing business premises (2007 Code) which was voluntary. The new Code took effect from 1 September 2020 and is in the form of a professional statement.
Whereas the 2007 Code was voluntary the 2020 Code includes some mandatory provisions for its members along with provisions which are considered to be best practice. Where a RICS member is departing from the ‘best practice’ provisions they may be required to justify their decisions and actions.
The intention of the new Code is "to improve the quality and fairness of negotiations on lease terms and to promote the issue of comprehensive heads of terms that should make the legal drafting process more efficient".
It is a requirement that, at a minimum, the heads of terms (for a vacant possession letting) contain a summary of:
- the identity and extent of the premises
- any special rights to be granted, such as parking or telecom/data access
- the length of term and whether the Landlord and Tenant Act 1954 (54 Act) will apply or be excluded
- any options for renewal or break rights
- any requirements for a guarantor and/or rent deposit
- the amount of rent, frequency of payment and whether exclusive of business rates
- whether the landlord intends to charge VAT on the rent
- any rent-free period or other incentive
- any rent reviews including frequency and basis of review
- liability to pay service charge and/or insurance premiums
- rights to assign, sublet, charge or share the premises
- repairing obligations
- the initial permitted use and whether any changes of use will be allowed
- rights to make alterations and any particular reinstatement obligations
- any initial alterations or fit-out (if known)
- any conditions of the letting, such as subject to surveys, board approvals or planning permission
Benefits of The 2020 Code
The 2020 Code does not bind landlords who are not regulated by RICS however it remains good practice for any landlord to adopt the provisions. It can lead to smoother negotiations between a landlord and tenant and ensure that the parties can agree a fair and balanced lease without extensive negotiation and therefore reducing unnecessary legal fees. This list also provide a useful prompt for both parties to think about in advance of negotiation.
In this series of articles we will explore a number of the above provisions of the lease to explain their effect and what landlord and tenants are likely to require in respect of each provision.