The Heads of Terms of a commercial lease are the terms that have been agreed by the Landlord and the Tenant. These are usually prepared by the Landlord (Landlord’s solicitors) and set out the core terms of the lease.
This article will review in detail the things that usually constitute the Heads of Terms and what their significance.
Details of the Landlord and Tenant.
As a lease is a legally binding document that confers rights and obligations, it is imperative that the correct parties are included it in. This is an especially important consideration for the Tenant as s/he may want to take the lease out in their company’s name to benefit from limited liability.
The Term (duration) of the lease.
This states how long the lease will be granted to the Tenant. It will usually be for a period of 5 to 20 years.
The Rent amount.
An annual figure that has been agreed between the Landlord and the Tenant will be stipulated here.
Any Rent Free period (if any).
Sometimes the Landlord will allow for a Rent Free period (usually three to six months) at the beginning of the tenancy. There are a number of reasons why the Landlord grants the Tenant a Rent Free period. However, one main reason is that a Rent Free period reflects that the premises cannot be used for business until some works are carried out by the Tenant.
The Rent Deposit amount (if any).
This is an amount requested by the Landlord from the Tenant before the lease completes. It is detailed in a document called a Rent Deposit Deed.
Insuring and repairing obligations.
As the new lease is usually drafted by the Landlord’s solicitors, a commercial lease is likely to state that the Tenant has to reimburse the insurance cost to the Landlord during the lease.
In relation to repairs, the Landlord will seek for the Tenant to maintain the premises in good condition whilst in occupation.
Service charge calculations/apportionments.
The Landlord will seek to recover any charges that s/he will incur in maintaining the premises whilst the Tenant is under the lease. This will include any electricity, heating, gas, water, telecommunication and the costs of maintaining any communal areas.
The Permitted Use of the property.
The Landlord will grant the Tenant a new commercial lease for permitted use(s) as stipulated in the Town and Country Planning (Use Classes) Order 1987.
Rules on Alterations at the property.
Commercial leases tend to be granted for a short and fixed period of time. The Landlord is likely to lease the same property to more than one tenant over time. Consequently, the Landlord will not want the property to be altered without his/her consent. If the alteration is agreed by the Landlord, it will be paid for by the Tenant.
Break Options available to the Landlord and/or the Tenant.
This provides a clause for the Landlord or Tenant to terminate the lease prior to the date that the lease is due to end if certain criteria are met.
The Rent Review provisions.
This allows the Landlord to adjust the rent to the market value at certain times in the duration of the lease.
The Landlord’s Forfeiture provisions.
This clause allows the Landlord to re-enter the premises if the Tenant breaches their obligations. These obligations relate to the Tenant not being able to pay the rent on time or being declared insolvent.
Payment of the legal fees involved in the transaction.
It is not unusual for the Landlord to ask the Tenant to pay his/her solicitor’s costs and expenses.
Details of the legal representatives of each party
This will be mentioned in the commercial lease and it should be accurate.
Please contact our Property Department if you are interested in granting or being granted a new commercial lease.