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Lease Heads of Terms – What are they and why are they important?

What are Heads of Terms

Most commercial property agreements start with Heads of Terms which are also known as Letters of Intent or Memoranda of Understanding. Heads of Terms is basically a document which sets out the terms of a commercial lease that are agreed in principle. Once Heads of Terms are agreed the details are then transferred into a formal legal agreement.

Are Heads of Terms legally binding?

Heads of Terms are usually drawn up after some negotiations between the parties to agree ‘headline’ terms. Heads of Terms are not legally binding. Even if a legal agreement is never formalised the Heads of Term are not legally enforceable. A deal is only truly agreed once both parties have signed formal documentation and the transaction is completed.

Why use Heads of Terms?

Agreeing outline terms at the beginning of a contractual process helps  avoid delays which may occur additional professional fees. It helps the process run smoother and more efficiently. The Heads of Terms will outline the skeleton terms of the lease such as the parties involved, the rent the term and the property purpose. It allows both Landlord and Tenant to identify their basic needs and agree in principle providing the foundations for a legally binding agreement.

How detailed should Heads of Terms be?

There will be varying levels of detail included in Heads of Terms as it generally depends on the size of the transaction and the parties involved.

Generally speaking Heads of Terms should include the following:

  • Property Details
  • Parties Involved and their Representation
  • Rent/Purchase Price
  • Rent Review Terms
  • Insurance Policies and Insured Amount
  • Lease Term
  • Break Clause
  • Permitted Use
  • Conditions to the Contract
  • Assignment/Subletting Provisions
  • Associated Costs and Timescales

Although not legally binding Heads of Terms shows the intent of the parties but does not legally enforce them to go ahead with the lease.

How do you know if you need a surveyor or legal advice for your commercial lease Heads of Terms?

As you can see from the list above the information in a Heads of Term agreement is quite detailed. Producing the detail while striking the right balance so that the negotiations don’t become drawn out is a skill in itself. It is recommended for both landlord and tenant that you instruct a surveyor to act on your behalf. Not only do they deal with Heads of Terms on a daily basis they will be able to advise if the terms are commercially sound. An experienced Surveyor will also manage expectations as some areas such as break clause can become contentious if not agreed in sufficient detail at Heads of Term stage.

What Next?

If you are entering into a commercial property arrangement and need help negotiating and drafting Heads Of Terms get in touch with us at O’Neill and Co on 045 856604.

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