Whether you are experienced in preparing heads of terms for a lease or completely new to them it is important to consider how they will work in practice.
There is often pressure to agree terms quickly to either secure the tenant or the premises but taking some time to understand the key terms at the outset can save costly negotiations further down the line.
Rent and outgoings
The financial liabilities under a lease might be a tenant’s biggest overhead. There may also be other costs payable in addition to the rent such as VAT, service charge, insurance, rates and utility bills and they should consider the financial implications carefully before entering into a lease.
Landlords may offer new tenants a rent free period or capital contribution as an incentive at the start of the term. This can help a tenant while they fit out their new premises before they start trading.
For longer leases it is common for a landlord to require rent reviews at intervals throughout the term to ensure that the rent increases in line with market conditions.
A landlord will often want a long term to guarantee the occupation of the premises and payment of the rent. A tenant may take comfort in a long term as a fixed location for their business premises but they will often want the flexibility of a break clause if business takes a downturn or they need to relocate.
A landlord will almost certainly want the lease to be excluded from the security of tenure provisions in the Landlord and Tenant Act 1954 but a tenant will need to appreciate the consequences of what this means at the end of the term.
Repairing obligations will vary depending on the age and type of the premises. A landlord will often require a tenant to keep the premises in “good and substantial repair”. However, a tenant may seek to limit its repairing obligations through the use of a schedule of condition.
In a long lease if there isn’t an option to break a tenant may require the right to assign or underlet the whole of the premises. Depending on the circumstances landlords may also agree to an underletting of part of the property. These provisions are often on the basis that consent is not unreasonably withheld or delayed but have strict conditions attached.
Although not legally binding on their own a well drafted set of heads of terms can help speed up the drafting of the lease, avoid protracted negotiations and keep legal costs under control.