Partner Article

David Leviten: Commercial lease Heads of Terms

So, you have found the perfect property for your company to rent and think you have agreed the terms when suddenly the landlord’s agent produces a document called the heads of terms (“Heads”) and asks you to approve it…

You stare blankly at the document and rather than appear stupid you just say: “it looks fine to me”. You take the view that it is not binding (which is true) and if your lawyer is unhappy then he or she will tell you. This is a big mistake that we see every day!

Firstly, always, always get your lawyer to check the Heads – along with any other legal document to do with a lease - before you approve it. This is imperative because if your lawyer spots something later in the lease documentation which he or she considers not acceptable (but is contained in the Heads) then it will at best be judged as lack of good faith on your part and at worse a deal breaker. Either way it will be costly in terms of abortive legal spend.

While you should always have a lawyer check the Heads for you, the following are common examples that prospective tenants make:

Agreeing to a full repairing lease. This may mean the tenant could be liable to remedy existing repairs. The tenant should consider limiting the repair obligation so that they are not liable to put the property into no better condition than at the date lease entered into. There should also be a photographic schedule of condition evidencing the current state. This could possibly prevent a dilapidation claim which could run into thousands of pounds.

Extensive service charge provisions which are open ended. The tenant should seek to cap the service charge. The service charge may be so extensive that it covers the ability on the landlord’s part - but at the tenant’s cost - to replace, as oppose to repair, existing facilities. This could include wages for the landlord’s employees and also pension provisions along with the cost of borrowing to the landlord. Without a cap, the tenant could find the initial service charge to be wildly under the actual cost.

Break clauses which are anything other than unconditional. Tenants often think that if the lease does not work out they can always exercise the break – not always so. Often, the preconditions are so onerous that effectively the tenant cannot exercise the break and is stuck in the lease even though they want out.

Agreeing that the lease is excluded from the Landlord and Tenant Act 1954. This looks innocuous but a tenant who agrees to this is effectively giving up their statutory right to remain in that the premises at end of the term and at that point able to negotiate a market rent. A landlord who has managed to secure a lease excluded from the Act will be able - should the tenant wish to stay on - to lay down exactly what rent and what terms he or she wants; and the tenant will have no right to force the landlord to be more reasonable. Strictly, a tenant who agrees to the Landlord and Tenant Act 1954 exclusion should pay less by way of rent as the tenancy is worth less.

Other issues include:

Agreeing restrictions on alienation on assignment and underlettings which are so restrictive that effectively the tenant will not be able to assign or underlet.

Paying the landlord’s legal costs – in most negotiations each party bears their own.

The Heads not adequately covering the works that the fit out the tenant wishes to do. Also, in some cases, not making it clear that the tenant wishes to take out some of its fittings at the end of the term having spent considerable sums.

The user being granted not being extensive enough to cover the tenant’s proposed use.

Extensive decoration covenants.

To sum up, the hidden dangers attached to negotiating a commercial lease are numerous so the message has to be: Always get your lawyer to check the Heads or proceed at your own risk!

This was posted in Bdaily's Members' News section by David Leviten .