InsightsInsight - Commercial Property - UPDATED: November 14 2022
Heads of Terms explained
Reckless negotiation of Heads of Terms on a commercial lease can often lead to parties unintentionally entering into an unfavourable legally binding agreement. It is therefore vital that this stage of the transaction is given careful consideration.
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What are Heads of Terms?
Heads of Terms (HoTs) is an essential preliminary document which sets out the skeleton terms of a lease that are agreed in principle between the parties in the course of initial negotiations. HoTs can vary depending on the complexity of the transaction but they typically outline terms such as the parties, the demised premises, rent, term, VAT, permitted use and any additional specific arrangements. HoTs can therefore provide the foundation for subsequent negotiations.
On any given day, a commercial property solicitor can be presented with either well-constructed HoTs or with a scrap of paper with the details of the agreement. Parties are often unaware of the pitfalls that HoTs can create and therefore it is vital that they take independent legal advice prior to entering into the lease. Particularly if a transaction is complex, HoTs can help flesh out any issues early on.
Are Heads of Terms legally binding?
HoTs are usually non-binding and remain subject to contract.
Under the Law of Property (Miscellaneous Provisions) Act 1989, the Heads of Terms may be considered legally binding if they are:
- In writing;
- Include the terms expressly agreed between the parties;
- Have been signed by all parties; and
- Include offer, acceptance, consideration and an intention to create a legal relationship.
Given that HoTs may satisfy the above criteria, it is important that they include an express provision as to whether the parties can rely on them being legally binding. Often, parties try to avoid HoTs being treated as legally binding by inserting the words “Subject to Contract”. This shows that the HoTs are instead intended only to be a set of terms in place to provide a level of certainty on various factors relevant to the lease.
In Commercial Property transactions, if the Heads of Terms are “Subject to Contract” can the Tenant move into the property while the finer points are negotiated?
In commercial property transactions, the Landlord and the Tenant are often working towards tight deadlines.
If the HoTs are understood to be “Subject to Contract” by both parties, then they will not usually be treated as a legally binding agreement. However, if either party are to carry out any of the obligations under the HoTs, this can undermine the fact that they are “Subject to Contract”.
If negotiations are likely to take some time, and the Tenant urgently needs to move into the property, then both parties should consider a Tenancy at Will whilst the lease is negotiated.
Points to remember when negotiating Heads of Terms:
- Heads of Terms should create a structure for the transaction.
- There should be sufficient detail in the HoTs to ensure protracted negotiations are not required, which will only result in delays and higher legal costs.
- If the parties do not intend the HoT’s to be legally binding, they must ensure that they are “Subject to Contract”.
- If the Tenant wishes to move into the property whilst the lease is negotiated, both parties may wish to consider a Tenancy at Will or license as a stop-gap.
- Although HoTs are often drawn up by agents, parties should consider instructing a commercial property solicitor at the inception of the matter. This will ensure that all potential issues can be identified and addressed prior to any detailed negotiations.
This content is correct at time of publication
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