By Karen Mason, a highly experienced commercial property lawyer and co-founder of Newmanor Law (www.newmanor.com), a specialist real estate law firm.
Whilst remote working was originally intended as a temporary solution during lockdown, there are a lot of businesses warming to the idea of it forming at least part of the working week, having been encouraged by improved productivity levels.
With this in mind, many occupiers will be looking to renegotiate lease terms or agree new leases to redefine their situation, once the restrictions are lifted in the coming months.
Whether it’s to downsize or acquire bigger offices to space employees apart, organisations of all sizes will seek new arrangements, requiring Heads of Terms to tie down what has been agreed, so that a healthy long-term deal can be secured.
Traditionally, Heads of Terms have been resolved before involving solicitors, which can cause delays later down the line. These agreements should provide the framework for the deal, detailing how it should be executed to ensure all parties are satisfied.
Early advice will save problems later
It is always best practice for businesses to draft Heads of Terms with the support of an experienced real estate lawyer, as lack of detail may result in unnecessary delays during the negotiations.
Important details like the price of the deal, identities of the parties involved, purpose of the contract, terms of the contract/transition, confidentiality agreements and any protection for the parties involved, will be included within a carefully drafted Heads of Terms.
When it comes to creating the Heads of Terms, it’s vital that the wording does not make it legally binding, as the detailed provisions will be included in the contract documentation.
The phrase ‘subject to contract’ will help ensure this is the case, but usually, the actions of the parties after the Heads of Terms are drawn up, will have as much impact on whether they are legally binding than the words themselves.
If, for example, the parties start to deliver the obligations set out in the Heads of Terms before a legally binding contract has been finalised, then the very act of doing so may be taken as an indication that these obligations are accepted as being legally binding.
For a lease agreement, these provisions might include:
• Details of the property itself, the address, whether it’s freehold or leasehold and whether the transaction deals with lease of the whole or part of the property.
• The details of any professional advisers working for the parties, such as solicitors, accountants, agents etc.
• The parties involved in the transaction, including any guarantor required, with names, contact details and whether the property is being let to a limited company or an individual.
• The length of any proposed lease term.
• The level of any security of tenure being proposed, particularly whether any lease will be covered by the Landlord and Tenant Act 1954.
• Whether any lease will include a Break Clause and, if so, whether there will be conditions to trigger it.
• If rent is being paid, the Heads of Terms will itemise the amount, the frequency and method of payment.
• The frequency of any rent reviews, and the method of review.
• The length of any rent- free period while the tenant is fitting out the property prior to formal occupation
• The amount (if any) of any other incentives to take the lease
• Whether a rent deposit is payable and if so, how much and when it will be reimbursed.
• Who is responsible for paying building insurance and if it is included as part of the rent.
• What purpose the property can be used for and whether the tenant can change that use in future.
• Whether the tenant is allowed to sublet the property or assign the lease to a third-party.
• Whether each party is responsible for their own costs, or if one has agreed to meet the costs of all parties.
• Whether the tenant is permitted to carry out alterations.
• A timescale detailing how long the transaction is expected to take.
• Adding a target completion date may also help to stop further negotiations becoming protracted.
Not binding but an invaluable guide
Once it has been agreed, the Heads of Terms will act as a guide and benchmark for progress measurement. The details of the negotiation can be changed once they emerge, but it’s important to reflect this in the documentation itself.
With efficient and successful deal execution a priority for all businesses, these Heads of Terms will become increasingly important in commercial property deals, as they allow the process to run smoothly.
Remember, a lot of time and energy can be saved by consulting a team of specialist legal advisers, who will ensure the Heads of Terms is drafted correctly, in a way that prevents any larger issues occurring.