Four Key Points a Commercial Tenant Should Look for in a UK Heads of Terms Agreement

Entering a commercial lease is a significant commitment. You will pay rent in exchange for the sole occupation of your commercial premises for specific business use over the lease term. Therefore, it is essential to negotiate the key terms of your lease agreement when you and your landlord draw up the heads of terms at the outset of your lease. This article will outline four key points you should look out for as a commercial tenant in the heads of terms of a commercial lease. 

Heads of Terms  

Before you form a commercial lease agreement with the landlord, you usually will draw up heads of terms. You may do this before you engage the assistance of property solicitors or legal advice.

Heads of terms are a list of the main terms you want to include in your commercial lease agreement for the commercial property you will occupy. Most are typically seen as ‘commercial’ elements. They are generally not legally binding as the lease agreement you will form later is usually the first legally binding contract.

Type of Lease 

A crucial point to look out for in heads and terms is the type of lease your landlord proposes. Additionally, you should determine if your landlord included security of tenure in the lease, which makes it a protected lease. 

A protected lease gives you the right to renew a commercial lease at the end of the lease term and ask for a new lease with the same or better terms. If your commercial landlord does not plan on a protected lease, the agreement will contain a clause to opt out of this. 

Costs 

A key point to look out for as a commercial tenant in the heads of terms of a UK lease is the costs you will commit to as part of the commercial lease. When you draw up the heads of terms, you will be fully aware of what you commit to and your ability to do so.

Your rental payments will be the main cost of your commercial lease. However, there are other costs you may need to look out for, such as:

• any VAT on your rent;
• annual service charges;
• any building insurance; and 
• whether you will need to pay a rent deposit.

In addition to noting what has been included, pay critical attention to how these are phrased or particularised. For example, it is ideal if the service charge proportions are indicated.

Restrictions

As a commercial tenant, you should look for any restrictions to using the commercial property during the heads of terms. It would help if you were satisfied with what you can do with your potential commercial premises to be sure they are suitable business premises. Therefore, the head of terms is an excellent opportunity to do so.

For instance, you can find out what:

• the authorised planning usage of the property is;
• if the property is listed;
• whether the landlord wishes to include a prohibited use of the commercial premises;
• if the landlord permits you to underlease, which is to grant a lease from your head lease; and
• whether you need your landlord’s cost to change the business premises.

Evidence of Intentions

When you create heads of terms with your commercial landlord to grant a commercial lease, you should look for words explicitly stating that the heads of terms are not legally binding. Some heads of terms say this for clarity. Therefore, you may look for the term ‘subject to contract’. 

When you draft the heads of terms with your landlord, you should note when it will become binding. In particular, this will be helpful if you decide not to continue with a lease and the landlord wants to assert that there was an agreement to lease in place (i.e. the heads of terms). 

You can reduce the possibility of a court determining that you and the landlord did mean to form a contract by:

• ensuring there is an explicit reference to a non-binding period; 
• not including a signature clause; and 
• expressing that it is subject to contract. 

Although, it can be beneficial in some cases if specific clauses are binding on the tenant, as it means the landlord must include them in the lease. 

Key Takeaways

Heads of terms outline the main terms you and your commercial landlord wish to include in your commercial lease. They are generally not legally binding but provide an opportunity to negotiate your commercial lease. As a commercial tenant, there are points you should look out for with heads of terms. For example, you should look out for what payments the lease will demand of you and any of the commercial property’s restrictions, such as if the landlord prohibits your use of it in any way.

If you need help understanding the head of terms as a commercial tenant in a commercial lease in the UK, LegalVision’s 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. So call us today on 0808 196 8584 or visit our membership page.

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