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Heads of terms for commercial leases in 2020

There has been a lot of discussion recently about tenants – in the uniquely difficult circumstances of 2020 – who are trying to escape their lease. But what about those who are looking to enter into a new lease in this market? 

The first step, as always, is to settle the key points of the agreement between the parties, usually known as heads of terms. In this article we offer a reminder of the things that should go into the heads of terms and, in addition, consider some particular factors that arise at present, because of the pandemic.

What goes into the heads of terms?

1. Parties’ details

Details of the parties, sufficient to draft the lease (including details of any guarantor).

2. Property

A description of the property (plus a plan) and reference to any other property which it is agreed the tenant can use, for example, a parking space or storage area. It is important to be clear about what exactly is included within the lease. This may seem obvious but letting part of a building will usually only involve the internal non-structural parts being demised and included in the lease.

3. Term

In other words, the length of the lease. In the past, terms were often 25 years , but now terms are much shorter: 3, 5 or 10 years are standard. A 10 year lease is likely to include a break clause.

4. Break clause

If such a clause has been agreed, the date should be recorded, together with any notice period required and any other conditions that must be met to achieve the break. The Code for Leasing Business Premises gives guidance on suitable requirements.

Coronavirus consideration: we are likely to see more tenants requiring flexible break clauses to be included in leases (such as rolling breaks), as they may be concerned about the possibility of further lockdowns in the future.

5. Security of tenure

The Landlord and Tenant Act 1954 offers a certain degree of security to tenants occupying a property for the purposes of their business. This means that on the expiry of their lease, the landlord can only refuse to renew in limited circumstances. It should be clarified whether the tenant will have the protection of the Landlord and Tenant Act 1954. In most cases these days because the lease term is short, the statutory protection will be excluded.

6. Force majeure

This is a clause whereby a party is released from their obligations due to an extraordinary event or circumstance. It is unusual to see such clauses in leases.

Coronavirus consideration: the courts will normally interpret such clauses very narrowly. We anticipate that there will be more requests to include force majeure provisions which specifically reference pandemics.

7. Rent

The amount of rent or how it is calculated (in the case, for example, of a turnover rent) and VAT if applicable. The period to which it relates – usually a year – and the payment frequency. This has historically been quarterly in advance. Any rent-free period which has been agreed should be set out, including details of when and how it is to be taken (at the outset, when a break clause is not operated, or spread out over a longer period).

Coronavirus consideration: we anticipate tenants will request rent payment frequency to be monthly. Generally rent is payable notwithstanding any circumstances. We anticipate tenants may try and negotiate clauses suspending rent if a situation arises that prevents them from trading from the premises.

8. Rent review

The timing and basis of any rent-review should be detailed. 5 yearly reviews are common in a 10 year lease and for shorter leases possibly after 3 years. RPI reviews could be yearly.

9. Rent deposit

The amount of rent to be deposited should be recorded, with any VAT, together with details of the deposit holder. Circumstances allowing for the return of the deposit earlier than at the end of the term or assignment should be considered and also recorded if agreed.

Coronavirus consideration: landlords may consider requiring higher rent deposits in the future, particularly on the letting of certain asset types.

10. Service and service charge

The share of any service charge should be referred to plus any limitation or exclusion.

11. Insurance

State who is to insure the property and what is to be included. The landlord usually retains control of the insurance arrangements at the tenant’s cost.

Coronavirus consideration: tenants may require the landlord to look for insurance cover if they are unable to use the premises as a result of a future lockdown.

12. Use

The use of the property to be permitted under the lease. Any restrictions or requirements should also be set out.

13. Assignments and underleases

Permitted alienation by the tenant should be recorded together with any tenant sharing arrangements.

14. Repair and reinstatement 

Record who is responsible for the repair of the property and the standard of repair which has been agreed.

15. Alterations, tenant’s fit out works and/or signage plus any landlord works

State the type of alternations the tenant can make (e.g. internal, non-structural) and whether consent is required. Details of the fit out/alterations/signage required and agreed in principle should be noted in broad terms. Any work the landlord agrees to undertake should also be described.

16. Other

If the agreement to enter into the lease is subject to survey, mortgage or consent this should be confirmed. Details of any agreement as to costs, the parties’ representatives, and timescale of the transaction should also be included.

Seek professional advice

Comprehensive heads of terms help the parties to consider and agree their requirements and obligations at an early stage of a transaction and they assist in making the letting process quicker and more efficient.

Even if you feel confident in agreeing the heads of terms yourself, always make any agreement subject to having the terms checked by your solicitor and a commercial agent. It is however better to take advice at an early stage in the negotiations. In most cases, the cost of taking advice will be far outweighed by the long-term benefits.

Further information

For more information from our team, please get in touch with your usual Druces contact or speak to: