What are commercial lease Heads of Terms?
As a Landlord or Tenant, it’s important to ensure there is no misunderstanding as to what is contained in a commercial property lease. To avoid any ambiguity, many parties opt to record the main terms of the lease prior to the document being drawn up by the Landlord and his solicitors. Having Heads of Terms not only helps to clarify what has been agreed, but can also save time and money by avoiding the need to amend the lease.
Key Terms to consider
When laying out Heads of Terms, key points to consider for negotiation include:
Tenant details
As well as personal details, you should ask the prospective Tenant to provide references and financial information to ensure that they will be able to pay their rent during the agreed term. Even if you are satisfied that they will, you may wish to ask for a rent deposit.
Property details
This will include the full details of the property being leased, as well as additional rights the Tenant may be granted by you, e.g. access to storage, or the right to park a car or van. It is important to establish the extent of your demised premises (those transferred by the lease), but in almost all cases, a plan is attached to the lease which will define the property.
Rent
While commercial leases are often granted at an annual market rate, the rent is frequently paid monthly or quarterly in advance. However, you can decide on the date of the first rent payment, as well as if you require a rent deposit from the Tenant.
Term
The length of the lease may be long- or short-term, but this needs to be agreed by both parties. If the lease is long-term, then a break clause may also need to be negotiated.
Business leases protected by the Landlord and Tenant Act 1954 give the Tenant an automatic right to renew their lease on the same or similar terms when the existing lease expires. Your solicitor will be able to advise you on potential exclusions.
Permitted use
While the Tenant should explain what they will use the property for, as the Landlord you should share any exclusions so that the Tenant is clear on what the permitted use of your property is.
Break clause
More common in long-term contracts, you will need to decide if you, the Tenant or both of you will be able to end the lease early by giving a fixed amount of notice. If you agree there will be a break clause, you will need to include the date of the break clause and any conditions of this break in the Terms (e.g. after 18 months into a two-year lease, only one month’s notice may be given).
Rent deposit
Although seen as the norm, it is up to you as the Landlord as to whether you wish to ask the Tenant for a rent deposit as security. If a deposit will be required, you will need to record the amount of the deposit and the date it is due in the Terms.
Rent review
If the lease is longer than five years, you may wish to include a rent review clause. This will allow you to adjust the rent in line with inflation and the current market. Any agreed rent review will need to be carried out on a specific date and should be mentioned in the Terms.
Repairs
It is always important to establish who will be responsible for internal and external repairs to the property.
Insurance
You should always check who will be responsible for the Buildings Insurance. Normally, the Tenant will pay the total or part of the insurance premium to the Landlord in order for them to insure the property.
Assignment and Subletting
Normally, the Landlord will allow an assignment of subletting of the whole of the property, subject to the Landlord’s consent and subject to certain conditions.
Landlord’s legal costs
This is often overlooked. You should always clarify who will be paying for the Landlord’s legal costs, as they can be considerable, especially if a rent deposit is involved.
Legal implications
It’s important to note that although Heads of Terms lay out the intentions of the parties, they are not legally enforced to complete the lease. Either party is still able to change their mind and decide not to enter into the lease. However, it is worth involving a solicitor who can identify and resolve any potential legal issues as soon as possible.
If you’re preparing to let your property and need help preparing the lease, Caversham Solicitors can offer you advice and guidance on a range of commercial property issues. Call us on 0800 085 5575.
