Heads of Terms are essentially the main heads of agreement between the Landlord and the Tenant which will be “subject to contract”. The Lease will include these heads of agreement and therefore it’s important to ensure that the Heads of Terms aren’t heavily biased in favour of the Landlord.
If the Tenant hasn’t had the benefit of an agent acting on its behalf or it hasn’t spoken to its solicitor before agreeing the Heads of Terms, once the Heads of Terms are sent to the Tenant and its solicitor they are usually treated as being set in stone.
The Tenant’s solicitor is likely to face resistance from the Landlord’s solicitor when it attempts to amend the Lease so that it is more favourable to its client. The Landlord’s solicitor will point to the Heads of Terms and say, “the Heads of Terms say so”! This is when it could get messy (and costly) for both the Landlord and the Tenant.
That is why it’s always in a Tenant’s interest to either instruct an agent to act on its behalf when negotiating the Heads of Terms or liaise with a solicitor at the earliest opportunity before the Heads of Terms are agreed. There is absolutely no room for naivety!
The five heads of agreement that may be contentious when the Lease is received by the Tenant’s solicitor are:
- Rent and Rent Free Period: This is where a surveyor’s input will be really useful to ensure that the Tenant is advised whether or not the proposed rent is acceptable for that type of premises in the area. If a rent free period can also be agreed, then that will mean that the Tenant will have a period when it first takes occupation and begins to build up its goodwill for which it will not be liable for rent
- Repairing Obligation: Full Repairing Obligation and a Limited Repairing Obligation. You will invariably see Heads of Terms refer to “FRI” or “Full Repairing and Insuring Lease”. A full repairing obligation can be extremely onerous. If the premises are in a poor state of repair and condition at the beginning of the term of a Lease, the Tenant with a full repairing obligation will be required to put the premises in to a good state of repair and then keep them in a good state of repair. The Tenant would ideally prefer to limit its repairing obligation so that it isn’t required to put or keep the premises in any better state of repair than when it took them at the beginning of the Lease. The Landlord would have to agree to this limited repairing obligation and would need to approve the Schedule of Condition that is annexed to the Lease to evidence the state of repair at the outset.
- Exit Strategy: Right to terminate the Lease early and right to assign the Lease (with Landlord’s consent). Where a Tenant is starting out in a new business or it agrees a Lease for a lengthy term, the ability to terminate the Lease during the term upon a few months’ notice will give it flexibility. It will not need to find a new Tenant to take over the Lease if it wishes to exit the Lease, it will merely serve notice in accordance with the Lease to terminate it. Ideally a right to terminate should be unconditional. A right to assign the Lease, although useful, will require the Tenant to obtain its Landlord’s prior consent and the Tenant will be required to comply with conditions and pay the Landlord’s legal costs for obtaining its consent.
- Security of Tenure: A Tenant of business premises will have rights of security of tenure under the Landlord and Tenant Act 1954. This means that the Lease will continue beyond the contractual end date and the Tenant may continue to occupy under the terms of the “expired” Lease until the procedure under the Act is followed to terminate it. The Landlord would have to serve not less than 6 and not more than 12 months’ notice to terminate the Lease and would have to cite one of the limited grounds of objection under the Act if it objects to the Tenant having a new Lease. The Tenant would be entitled to a new Lease unless the Landlord is able to prove one of the grounds under the Act. Any new Lease that is granted to a “protected” Tenant would be on terms that are no more onerous than those of the current Lease. Therefore a Landlord may require that the Lease is to be excluded from the Act. This should be resisted if possible as the Tenant will build up goodwill during its occupation and will not necessarily want to go through the cost and inconvenience of setting up its business elsewhere.
- Rent Deposit v Personal Guarantee. Where a Limited Company wishes to take a Lease, a Landlord may try to obtain a personal guarantee from the directors of the company. This should be resisted as it would mean that the directors’ own personal assets are put at risk. The alternative would be to offer a Rent Deposit which would be held and utilised by the Landlord in the event of a default.
These are just some of the issues that will concern a Tenant and what is eventually agreed will depend on the bargaining position of each party. The main point to remember is: “if you don’t ask, you don’t get” and you need to know what to ask for in the first place!
That is why it is so important that before a person or business agrees Heads of Terms, it seeks legal advice at the earliest opportunity.
For futher information, please contact Shilpa Unarkat on 0121 746 3300, email s.unarkat@sydneymitchell.co.uk or fill in our online enquiry form.
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