Heads if terms can be referred to when you’re looking to take a lease at a property, particularly with commercial premises rather than a usual short-term ASTs with residential property. They can also appear when preparing for a freehold or leasehold sale of whatever property interest.
They are not as complicated or legally applicable as you might think, however, we still an important document to get right and not waste time and money on getting these correct - particularly when solicitors are involved.
Therefore, here are a few common questions about them answered, followed by seven key elements you find in them.
Heads of Terms Questions
What are Property Heads of Terms, And What Do They Mean?
Basically, a summary of the agreement between the parties involved in a property transaction, used to instruct a lawyer to produce the actual lease or sales contract.
In even simpler terms, a to-do list for what the legal people need to include in the legal documentation.
Is There a Simple and Standard Heads of Terms Template That Can Be Used?
If you already have solicitors or advisors involved, then ask them, as such templates or at least format will be determined by the type of transaction that you’re dealing with.
For lettings with commercial properties, the RICS have a useful document called the Code for leasing business premises, with a heads of terms checklist and template at the end which can be used, however, does require the rest of the document to be read in order to fully appreciate these.
Who Drafts and Prepares These Heads of Terms?
Ideally, not by solicitors surprisingly - but rather the agents, surveyors, or property advisors that have first negotiated and agreed the transaction.
Once drawn up by them, these heads of terms can then be issued and circulated to solicitors for them to use in preparing the legal documentation.
Only in certain and more complicated circumstances will they need to be first involved with these terms - or if the property advisors have not completed these correctly or comprehensively, as is often the case.
How Do You Write These Heads of Terms, and What Should They Include?
We’ll come onto the content of these in a moment, but in short, they need to include the main points about the property transaction - including the people involved as well as key pieces of information that has often been negotiated, for example the rent or price, and the terms of the proposed legal documentation.
On a practical note, if you’re using a template or say word document, then often there are boxes and lines of information with gaps in a column to then enter information within.
What you tend to find as well is that this takes longer and requires more research than you might think. This may also need to include looking through previous agreements, or asking the other party for further details.
But time spent wisely will save delays and confusion later on.
Are Heads of Terms Legally Binding?
Probably not in the sense that they are only a summary for what will be a future separate and legally binding document.
However, make sure statements like ‘subject to contract’ are stated on here and in general correspondence in order to ensure no legal rights are inferred otherwise, and you don’t end up with a legally enforceable property contract.
So, Heads of Terms Need to Be Signed?
In short, no. It’s only the legal documentation that follows that needs this.
What is worthwhile though is making sure all parties then agree terms to these and confirm any other points to include before final circulation.
Seven Key Factors to Property Heads of Terms
As we look at what information needs to be included in Heads of Terms, then a good example is for a new lease of commercial properties.
As mentioned earlier, the RICS have issued a guidance note on this that members need to comply with and other parties made aware of, and which is also applicable for any leases being renewed and assigned as well as new lettings.
1. The Parties
Although this may be obvious, as in the landlord and tenant already know who the other side is as they have been negotiating with them - the detail now matters.
Find out they exact names rather than just their agents and representatives, and make sure you have correct and full contact details.
Also, consider others like solicitors acting on their behalf and other parties like guarantors.
2. The Premises
This is easily missed in the rush of getting on with a new lease - the extent of the ‘premises’ being let.
Drill down into the detail, ideally with a full and Land-Registry compliant plan edged up, and a full description.
Clarify what it includes up to, for example any of the main structure and windows and doors. Also, any additional rights of access or parking that are required.
Then consider what use the property will be occupied for, and if this can be changed in the future with or without the landlord’s consent, and in line with any planning permissions.
3. The Time Frames
The main one of course is how long the new lease will last for, otherwise known as the length of it is term - and if there are any break options in here for either the landlord or tenant, to end things earlier.
But then look at what date this will commence from, and what expectations are for completing the final lease in order for it to take effect. It’s best to know sooner rather than later if this will be a long time in order to look at things like a preliminary Agreement for Lease.
4. The Rent & Price
Of course , the most important aspect really - what rent will be paid, or what price agreed for any sale.
But don’t forget the detail such as any agreed basis of rent reviews and initial incentives such as rent free periods (and on what basis).
Plus, good old VAT must be clear and whether it needs to be additionally charged for that property, as this could be a deal-breaker for tenants or purchasers who can’t reclaim this back.
5. The Security
This is important for a landlord, to know if the tenant is good for the money and will be well behaved in the property - not only to ensure regular payments and no issues, but provide enhanced values through what they call ‘covenant strength’ of tenants.
If future references or credit and accounting check are still required, then state this clearly and that conditional upon.
And bring in other ways to secure the lease if needs be, for example a separate guarantor, former tenants, and rent deposits.
You can even think about how the tenant can what they call ‘alienate’ the lease afterwards, which is basically sub letting it or assigning the lease over to someone else if they no longer want the premises. Not only whether this is permitted with landlord’s consent, but reasonable conditions for this.
6. The Costs
This is something else that can get easily missed in the frenzy of agreeing a new deal - what costs the parties are lumbered with.
During the proposed lease there will be things like insurance premiums, service charges, and utility costs that someone somehow must cover.
Plus, more one-off ones for the transaction to complete, for example legal and advisor fees, provision of other reports and an EPC, and any final taxes like VAT and SDLT.
1. The Condition
And finally, look at the practical condition of the property and how this will be maintained and managed going forwards.
In addition to usual condition and repairs, and any limited liabilities through say a Schedule of Condition - consider statutory compliance ones like electrical testing and asbestos surveys.
Plus, think of the future, and if the tenant can carry out any alterations in a certain way and with landlord’s permission, and how the property will re-instated back at the end of the lease when left empty.
Getting the Head-Up on Heads of Terms for Property Deals
As you look at suitable Heads of Terms for whatever property lease or sale you’re involved with, then make sure you start from the simple principle that these are supposed to be a summary of the agreed terms for solicitors to then draft the actual lease or documentation.
Whatever part you’re playing, add in your input and make sure others do their part.
Then make sure it’s comprehensive and covers everything that it should be - failing which there will probably be a lot of additional costs, delays, and issues that no one expected.
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