Heads of Terms and the Negotiation of Leases

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Commonly, both a Landlord and a Tenant will instruct agents to negotiate the initial terms of a lease.

Whilst the heads of terms aren’t the final agreed negotiations, they do set an important starting point and usually seek to set out the parties position on the main lease terms. This will help with the initial drafting of the lease and hopefully iron out any major points of issue at an early stage.

Where parties negotiating a lease do not have an agent and are agreeing terms between themselves, the following main items should be considered:

1. Parties:

Will there be any guarantor?

2. Extent of Property:

Is this the whole of the property or part, does this include parking spaces and is there a plan?

3. Lease Term:

Is the lease to be excluded from Sections 24-28 of the Landlord and Tenant Act 1954 or included? If excluded, a Tenant would have no protection under statute to remain in the property at the end of the term and so would have to negotiate a new lease. If included, a Tenant would have a protected tenancy under statute which can only be ended on certain grounds.

4. Annual Rent and Rent Review:

When is this paid and how?

Is there to be any rent free period and if so, for how long?

Is there any rent review and on what terms (e.g. open market rent (upwards only), turnover rent, reviewed on RPI)?

Will there be any rent deposit to secure the tenant’s obligations?

5. Rights granted and reserved:

Does the Tenant need to be granted any specific rights e.g. over common areas, parking, passage of services?

Does the Landlord need to reserve any specific rights?

6.Break Clause:

Is there to be an option for either the Tenant or the Landlord to break the lease and are there any conditions to this? E.g. any break penalty, vacant possession given, all lease covenants to be complied with and all lease payments paid up to date.

7. Service charge and services:

Is the Tenant to pay a service charge and is this to a proportion or fixed percentage?

Will there be a cap?

What services will the Landlord be obligated to provide?

8. Insurance:

Will the Landlord insure the Property and recoup the cost from the Tenant?

Will this include all usual insured risks?

Can both parties terminate the lease if the property is damaged by an insured risk and the Tenant cannot occupy?

Can both parties also terminate if the property is damaged by an uninsured risk?

9. Use:

What is the permitted use and can the Tenant change this with/without Landlord consent?

Are there any restrictions on use/hours of use?

10. Assignment/Underletting/Dealings:

Can the Tenant assign the whole of the property with Landlord consent?

Can they underlet the whole or part of the property with Landlord consent?

Are there usual conditions to such assignment/underlettings?

Is group sharing allowed?

11. Repair:

Is the lease to be a full repairing lease with the Tenant responsible for all repairs?

Is the repair covenant to be limited so that a Tenant doesn’t have to put a property into any better state of repair than it is in at the beginning of the lease evidenced by a photographic schedule of condition?

Is the Tandlord to be responsible for the structure/any common parts and recoup the costs of repair of such under the service charge?

12. Alterations:

Can the Tenant make alterations to the property and if so, are these internal non-structural alterations only and not external/structural?

Is the Landlord’s consent needed for such alterations?

Is the Tenant able to erect signs and is the Landlord’s consent needed?

13. Fitting out works:

Will the landlord or tenant be carrying out any fit out works and is landlord consent required if the tenant is carrying out such works?

14. Any other specific bespoke terms:

Are there any other specific terms agreed outside of the above?

If you’re considering entering into a commercial lease and would like assistance negotiating terms or drafting a lease itself, please don’t hesitate to contact our Commercial Property team.

(July 2022)