Lease Heads of Terms: Top Ten Tips

Heads of terms (HOTs) are used to outline the key commercial property terms of a proposed transaction.

They are issued prior to solicitors being instructed and form the basis of the terms to be included in the legal documents.

A well-drafted set of Heads of Terms will:

1. Help the transaction run smoothly;
2. Avoid unnecessary delays caused by protracted negotiations; and
3. Keep legal costs down.  

Carry on reading for our top ten tips for improving your Heads of Terms when entering into a commercial lease.

If there will be a break clause, the break date(s), the length of notice required and any pre-conditions to exercise the break should be set out in the Heads of Terms.

If the pre-conditions are not set out in the Heads of Terms, it will be for the solicitors to negotiate what the break conditions will be.

As the parties are likely to have very different ideas about what, if any, conditions there should be, this can lead to delays.

The landlord should set out any conditions it is entitled to impose when giving consent to an assignment and any circumstances in which it can refuse consent.

In particular, it should be made clear whether the landlord will be able to insist on the tenant giving an authorised guarantee agreement (AGA) in respect of a new tenant or whether an AGA can only be requested where reasonable to request it.

It is also helpful if the Heads of Terms specify whether the landlord will be entitled to require a guarantee from a third party and a rent deposit deed on all assignments or only where it is reasonable to request such security in the circumstances.

The usual position is that responsibility for repairs will rest on the tenant.

Unless otherwise agreed, it is generally assumed that the tenant's obligation to repair is in the institutionally acceptable form "to keep the property in good and substantial repair and condition".

If it is intended that the tenant's repairing obligation will be limited by reference to a schedule of condition or by carving out latent defects or existing contamination, this should be set out in the Heads of Terms.

There is a growing trend towards ESG considerations amongst property owners, and green leases are becoming more popular.

A green lease is a lease which includes provisions aimed at managing and improving the environmental performance of a building.

Green leases can range from "light green" to "dark green".

Light green lease clauses impose less responsibility on the parties, such as an agreement to discuss improving environmental performance.

Dark green leases contain more specific clauses, which are legally binding and require a more significant level of commitment to environmental issues.

The parties should discuss their requirements regarding green lease clauses early so that the agreed position can be recorded in the heads of terms.

Overseas entities that own property in the UK must be registered on the Register of Overseas Entities at Companies House.

This includes companies that own a leasehold interest for 7 years or more.

If relevant to the transaction, it is good practice to include details of the relevant party's Overseas Entities number in the heads of terms to make the registration status clear from the start.