Key Provisions in a Commercial Lease Heads of Terms

If you intend to lease commercial property for your business in England and Wales, you may have heard the phrase ‘heads of terms.’ Whether you are renting commercial property or a landlord seeking a tenant for business premises you own, you will need to negotiate with your prospective landlord or tenant before you agree to enter into a commercial lease. This article explains the heads of terms and key provisions to include.

What Are Heads of Terms?

The heads of terms concerning a commercial lease is a document that lists the main terms agreed upon between the landlord and the tenant. The commercial lease agreement will make these key terms legally binding. Notably, negotiations over the provisions can take time, particularly if there are any areas of contention.

Heads of terms are not usually legally binding. However, they form the basis of the commercial lease agreement, which will be legally binding. To ensure that your heads of terms are not legally binding, you should ensure you label them as ‘Subject to Contract.’

Key Provisions in Heads of Terms

The heads of terms will include essential terms about the property, including:

• the definition and extent of the property to be leased, 
• the amount of rent payable, 
• how long the lease term will be; and 
• other important terms.

Details of Involved Parties

The heads of terms should set out the full details of both the landlord and tenant. Having this information set out in the heads of terms clarifies and identifies the contracting parties. Likewise, it provides satisfaction as parties have the assurance that they are contracting with a reputable business entity.

Property Definition

As you would expect, the heads of terms should detail the address and complete information about the property. This is particularly important where the premises are part of a larger property. In addition, if the tenant needs certain access rights or parking provisions, the heads of terms should also detail those rights.

Permitted Use and Alterations

The heads of terms should also set out how the tenant can use the property and specify any alterations they may make. Permitted uses are essential to agree with commercial properties in England and Wales, as they are classified for particular commercial uses. Indeed, if a tenant wanted to use a property for anything other than the activities it is classified for, they would need to obtain planning permission.

Rent Amount

The heads of terms will agree on the amount of rent payable, any rent-free period agreed, and any other costs involved with leasing the property. These costs may include:

• service charges; 
• VAT payable; 
• a contribution to utilities; or 
• insurance costs.

As well as agreeing on the rent amount, the landlord will also likely want to negotiate to review the rent amount from time to time, mainly where the lease term is longer than a few years. This would usually be limited to increasing rent so that it is in line with whatever the current market rent is for similar properties in the same area.

Lease Term

Additionally, the heads of terms will detail the lease term agreed between the landlord and tenant. For example, suppose the landlord and tenant have agreed that the tenant will not have a right to renew the lease at the end of the lease term. In that case, the leads of terms should specify this detail. Otherwise, tenants of commercial properties in England and Wales have an automatic right to have their lease renewed by law. This concept is known as ‘security of tenure.’

Ending the Lease Early

The heads of terms may also detail whether the landlord has agreed that the tenant can end the lease early. If so, in what ways they can do this. 

For example, the parties may have agreed to a break clause (or early termination clause). This clause will allow the tenant to end the lease early, usually during a specific period in the lease term or after a certain amount of time. In addition, the landlord may have agreed that the tenant can find a new tenant to take over the lease (this is a lease assignment) or sublet the property to another person. If the parties agree on this, the heads of terms should contain specifics about how the tenant can exercise this right.

Responsibility for Repairs and Maintenance

The landlord and tenant should also agree on who will be responsible for keeping the property in good repair. If the property in question is not in particularly good condition, the tenant can negotiate for a Schedule of Condition to be agreed upon. This document lists the property’s condition in detail. So, the tenant’s obligation is limited to keeping the property in the same condition rather than being obliged to improve the state of the premises to the benefit of the landlord.  

Key Takeaways

The heads of terms are an essential document to agree on before you decide to lease commercial property. They contain all the critical terms that you and your landlord or tenant have agreed on during negotiations, including:

• the rent amount;
• how the tenant can use the property; 
• the lease period; and 
• other important terms. 

Importantly, the heads of terms are not usually legally binding. However, they will form the basis of the lease, which will be legally binding once signed and dated. Therefore, you must be clear on what you are willing to negotiate on so that you are happy with the heads of terms before you commit to the ensuing commercial lease agreement.

If you need help with negotiating heads of terms concerning a commercial lease, 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. Call us today on 0808 196 8584 or visit our membership page.

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