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11th May 2018

Heads of Terms – Some Points For Would-Be Tenants

Heads of Terms (HoTs) are the starting point for most transactions and are usually prepared by the landlord or their agent, detailing the ‘agreed’ position on a number of the key commercial points in a lease to enable the negotiation of the lease to proceed without undue delay. It is important that they cover any key concerns for the parties. Tenants should take legal advice at the HoTs stage, and ensure that any specific or unusual requirements are included in the HoTs as introducing new and/or unusual terms at a later stage can be difficult and cause delays.

 

Some points for potential commercial property tenants to consider include:

   

Extent of the property  rights included: A lease can either be of the whole or part of a building and the extent of the premises being let to the tenant should be properly identified in the HoTs. A tenant will be responsible for the full extent of the premises being let to it (including in the case of a whole building, the structure roof and plant and machinery in it) and a tenant usually will not be able to use or occupy any other part of the building, unless specific rights are granted. Tenants should consider the rights they need or want – such as for parking, use of common parts & facilities, additional storage areas, roof space for plant, as well as signs outside of the premises being let.

   

Term, termination rights & security of tenure: The length (“term”) of the lease must be agreed, and whether there are any early termination rights. Unless expressly agreed, neither party can unilaterally terminate the lease “at will”. A tenant should resist agreeing to any conditions which could jeopardise the validity of the exercise of any right to terminate, such as compliance with covenants or payment of all rents.

The law provides tenants occupying property for business use with statutory protection called “security of tenure”, which means that at the end of the contractual term they have a right to remain in occupation, and can apply to the landlord for a new lease on substantially the same terms as their current one (subject to an uplift in rent). In certain circumstances the landlord may (on following the required procedure) be able to bring the occupation to an end, and avoid granting a new lease, but they may have to pay compensation in order to do so.

It is possible to exclude the right to security of tenure (often called ‘contracting out’) provided certain steps are taken before the lease is entered into, in which case the tenant has no right to remain in occupation or to a new lease. A tenant should consider very carefully whether to agree to “contract out” of these rights, particularly if their location is key to their business (and its value).

Repair: Most commercial tenants are responsible for the repair of their premises, and all the plant and machinery within them. A repairing obligation may potentially oblige the tenant to put the premises into a better state of repair than it was at the start of the lease, and (as mentioned above) a lease of whole frequently includes the whole of the structure, not just the interior. Leases of part are usually more limited, with the landlord responsible for maintaining the structure and exterior, but recharging the cost via a service charge payable by the tenant (which can also be costly).

Accordingly, a tenant should consider limiting its responsibility by agreeing a “schedule of condition” which records the state of repair of the property at the start of the lease, and tenant’s obligation to repair the property is limited to keeping it in no better condition than that shown in the schedule. The schedule of condition forms part of the lease and a tenant should commission a professional and comprehensive schedule of condition to protect against substantial repairing costs.

For leases of part of a building, a tenant should inspect service charge accounts for previous years and budget for the current year, as well as considering the state and condition of the remainder of the building, and the potential cost of its repair and maintenance, which will almost certainly be included in the service charge. It is possible to agree an annual cap on the service charge, but this is best raised early.

   

Alterations: Most leases will restrict works which a tenant may carry out to the premises, and will require the tenant to obtain the landlord’s prior written consent. Usually the landlord will insist on a ‘licence for alterations’ which will set out which works are permitted, and impose obligations in respect of the carrying out of the works, and their removal works before the end of the lease. Any tenant wishing to carry out fitting out works immediately on occupation, should raise their requirements early to ensure that they are agreed in principle, and any necessary licence completed at the same time as the lease.

   

Dealing with the lease/premises: A lease will usually prohibit occupation of the premises by others except in certain cases, and will normally have detailed clauses dealing with how and when the tenant can either assign (sell/transfer) or sublet the property. These will include the landlord being able to ‘vet’ the financial strength of the proposed buyer and to impose conditions on the assignment, including that the outgoing tenant give a guarantee (sometimes called an ‘AGA’) that the new tenant continues to comply with the lease obligations after the lease is sold.

Stamp Duty Land Tax (SDLT): Many tenants do not appreciate that, depending on the amount of annual rent payable and the length of the lease, the lease may be subject to SDLT, which currently is payable within 30 days of completing the lease. A tenant’s solicitor will usually provide an estimate at the start of the transaction, and will assist with preparation of the required SDLT return, as calculating the tax payable by the tenant etc.

   

How long does it take to negotiate and complete a lease? There is no set timescale for how long it takes from issue of HoTs to completion of the lease and keys being handed over.   However, a normal lease transaction (i.e. with no unusual terms or third party consents required) will usually take around eight to ten weeks.  It is possible to complete a lease in less time, but this is likely to involve more concessions and compromises in the negotiation, and parties should let their solicitors know as soon as possible of any target completion date or deadline.

     

The Lamb Brooks Property Law Team have considerable experience in the review of HoTs, and are happy to provide comments and suggestions in the early stages of negotiations as this can assist in avoiding delay at a later stage.

   

For further information please contact Bryony Dew, Solicitor on 01256 305553 or email mailto:bryony.dew@lambbrooks.com 

 

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.

 

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