When are Lease Heads of Terms Binding in the UK?

As a business owner, you likely need to lease a commercial space for your business. You will form and sign a lease agreement when you take out a commercial lease. However, before this is signed and finalised, you may create a lease heads of terms between you for the commercial property. These detail the main terms you wish to include in your lease agreement and are crucial to the lease transaction. However, it is essential for you as a commercial tenant to be aware of whether these legally bind you in any way as a formal legal agreement. This article will, therefore, explain key points about heads of terms and examine whether they are legally binding.

What are Heads of Terms?  

With your legal representatives, you and your landlord will set out the terms of your lease agreement. This preliminary document outlines the commercial lease’s main terms and is the head of terms. Another expression for heads of terms is ‘letters of intent’ or ‘memoranda of understanding’. The heads of terms therefore set out the commercial terms and any special terms you have negotiated for your lease agreement before you negotiate the legal terms of the lease. They are used by the landlord’s lawyers to prepare the first draft of the lease agreement.

Heads of terms are helpful for you as a commercial tenant as they allow you to ensure both parties agree to key terms before negotiating the lease agreement, thereby reducing the need to argue with the landlord about key requirements later. They can also help you foresee how to structure the lease agreement and speed up the drafting process. Heads of terms record your intentions and can be helpful as evidence if, for example, the lease agreement does not reflect what these are once the lease agreement is complete. In this case, a court can use them to override the actual legal agreement.

What Do Heads of Terms Contain?  

Lease heads of terms will be unique to each commercial space in terms of what you and your landlord wish to include in the lease agreement. However, they will typically contain:

• the rent;
• details of you as the commercial tenant and your landlord;
• the reason for the lease;
• the use of the commercial premise;
• the fixed term of the lease;
• whether the lease has a security of tenure, so it is a protected lease;
• description of the land;
• critical terms of your lease agreement, such as if it contains a break clause, rent review or rent-free period; and
• protections for parties. 

Are Heads of Terms Binding?

Sometimes, however, it can be unclear whether lease heads of terms are legally binding, and on rare occasions, courts have found they are. The law states that heads of terms may be binding if they:

• are in writing;
• detail what you and your landlord expressly agree;
• are signed by the parties;
• intended to form a legal relationship; and 
• include acceptance and consideration.

Unless there is a specific reason for the heads of terms to be binding, you should avoid them being binding on you as they are not complete terms and only the basis for the full terms you are due to a later form. Therefore, including an express provision in your heads of terms is a good idea. This can state that your heads of terms do not legally bind the parties. Alternatively, you may use the terms ‘subject to contract’, but this carries risk because if you or your landlord start carrying out any of the heads of terms before you form the lease agreement, they could be legally binding.

While heads of terms usually are not binding, they may contain clauses you want to be binding. For example, you may both want binding lockout clauses that prevent either party from entering into discussions with another party. A clause like that reduces the pressure on you to rush the formal lease agreement process.

Key Takeaways

Lease heads of terms are generally not legally binding. However, they may be legally binding in certain conditions and on rare occasions, courts have found that they are. These are where they are signed, in writing, detail what you both expressly agree, and include an intention to form a legal relationship, acceptance and consideration. As heads of terms outline your intention, it is usually in your interest to ensure they are not legally binding, so you may include an express clause to state this. 

If you need help understanding lease heads of terms in the UK, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0808 196 8584 or visit our membership page.

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