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The heads of terms (HOTs) are the first important document in any commercial transaction.
The HOTs set out the terms agreed between the parties in principle. HOTs are not legally binding however, certain provisions within them may be.
Here commercial property solicitor Aimee Thomas considers five points which are often overlooked at this early stage and could have significant implications for the future of your business.
Whilst the majority of HOTs will state the amount of rent payable for the premises, fewer will mention the type of rent review provisions. Rent review is linked to either the value of the property on the open market, or related to the retail price index. It is also sensible for the HOTs to specify how often the rent is to be reviewed in order to provide security and certainty for the tenant going forward. Most leases today have upwards only rent review so the rent will only ever increase therefore tenants should try to avoid overly frequent rent reviews.
Repair / Alterations
Often tenants will take on a premises knowing that they need to make alterations to the property. The HOTs should allow for these alterations in advance of taking possession of the property. The HOTs should also detail the level of repair required by the tenant at the end of the term, to limit the costs payable by the tenant at the end of the contractual term. The tenant should consider instructing a surveyor to prepare a schedule of conditions as to the state of the property at the time of possession, which will provide an objective comparison at the end of the term.
Depending on the type of business it may be an important feature of a business that they are allowed to sublease part of the premises to others. The tenant should make sure that the alienation clause in the lease / HOTs allows sufficient flexibility to allow the business to do this. Consent to alienate may only be granted if certain conditions are met, such as the outgoing tenant entering into an authorised guarantee agreement guaranteeing the performance of the incoming tenant, therefore careful consideration should be given to any alienation provisions.
As businesses grow they may look for alternative larger premises or relocate to an alternative town / city therefore it’s advantageous for the HOTs to consider having multiple break options throughout the term, should the property no longer be appropriate for the business. Similarly, you should also give some thought as to whether you may want the option to renew the lease in the future once the contractual term has come to an end.
Businesses need the flexibility to grow and develop over time. A user clause which is too narrowly defined could restrict a business’s ability to do this. When it comes to using clauses, the broader the better for the tenant. However, the landlord will still want this to be defined with sufficient certainty so that they know that there is not an endless possibility on the type of business that could be conducted at the premises.
Including these points above in your HOTs can avoid future disagreements when it comes to actually drafting the terms of the lease. Having the main provisions of the lease set out in the HOTs provides assurance to both parties, can help limit legal costs, and assist with a speedy completion.