Commercial lease heads of terms

Recording the main terms of the lease before the document is prepared can save both parties time and money and help prevent any misunderstanding about what the lease will contain.
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Heads of terms reflect the deal reached between the landlord and the tenant, so that the lease can be prepared. Getting it right at the beginning means that the landlord can plan the rental income he will receive, know when he will get the property back and inform the tenant(s) of what he expects from them. Heads of terms are usually prepared by the landlord and are specific to each lease and property.

There are a number of key points that should be considered and negotiated with the tenant:

  • Tenant details - the landlord will want to obtain references and financial information about the tenant to make sure the he is satisfied that the tenant can pay the rent during the term.
  • Property - the full details of the property should be included along with any additional rights the landlord will grant the tenant – eg the right to park a car, or access to a cycle store.
  • Rent - commercial leases are usually granted at a market rent for an annual sum paid monthly or quarterly in advance. Rent can be paid on completion of the lease, or the landlord may decide that the tenant can have a rent-free period so rent payments will start on a future date.
  • Term - how long the lease will run for needs to be agreed. Depending on the length of the term, other clauses, such as a break clauses, may be relevant. A short-term lease usually runs from between 1-3 years.
  • Assignment and underletting - depending on the length of the term, the landlord may allow the tenant to assign or underlet the whole of the property. An assignment allows the tenant to pass on the lease to another, an underlease allows another to use the property, but the tenant is still responsible for the property under their headlease. For more information see Assigning a business lease and Subletting business premises leases.
  • Permitted Use - the use of the property must be recorded so that the tenant knows what the permitted use of the property is.
  • Break clause - the landlord needs to decide whether he, the tenant or both of them will be able to end the lease early on notice to the other. If there will be a break clause the date and any pre-conditions should be included. For more information about break clauses see Break clause notices.
  • Security of tenure - short-term leases are usually ‘excluded’ from the statutory right to a new lease when the current lease ends. In Scotland, there is no statutory provision that provides the tenant with an automatic right to stay beyond the lease end date, with the exception of the Tenancy of Shops (Scotland) Acts 1949 and 1964. If notice of termination is not given by either landlord or tenant at the end of the lease, the lease will continue under the same terms on a yearly basis (this is known as tacit relocation) until valid notice is provided. For more information see Security of tenure.
  • Rent deposit - if the landlord is concerned about whether the tenant will be able to pay the rent the landlord could request that they provide a rent deposit as security. If so, the amount to be paid should be recorded in the heads of terms.

Although not legally binding, heads of terms show the intent of the parties but do not legally enforce them to go on and complete the lease. Either party can still change their mind and not enter into the lease.

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