Getting A Head Start – Why Tenants should obtain professional advice before agreeing Heads of Terms

In many leasehold transactions the legal adviser only becomes involved once the tenant and the landlord have already agreed the Heads of Terms for the transaction, usually with the aid of an agent. Once finalised, Heads of Terms form the basis of any leasehold transaction and cover key factors such as length of term, break dates, rent review provisions and repairing obligations.

Once agreed, it can then be difficult for a tenant to try to vary the agreed terms if the legal adviser suggests that there might be better options to consider or if key points have been left out of the document. A full and thoroughly considered set of Heads of Terms can save both parties time and money in the long run as the more that can be agreed up front means less negotiation and re-drafting of the lease clauses during the transaction.

The following are some of the key points which should be considered by tenants before the Heads of Terms are formally agreed:

• Should you be asking for a rent free period? If the premises have been empty for some time or you have a strong tenant covenant you could see if the landlord would grant you a rentfree period or contribution towards fitting out works.
• Is the rent review clause right for you? Open market upwards only rent reviews are the most common. However in the retail market we are seeing a move towards turnover rent leases where the tenant only pays more if their revenue increases. You could also consider asking for a ’collar and cap’ rent review. This is where the rent will increase by a minimum amount but will be capped at an agreed amount, helping you to budget your costs more effectively.
• Is the lease flexible enough for your business to grow during the lease term? Restrictions on alterations are common, but if they are too restrictive you won’t be able to adapt your space as your business grows. On longer leases, tenants should consider whether the break clauses are as tenant-friendly as possible and ensure that the break will only be conditional on payment of principal rent and giving up occupation (with no continuing subleases).
• Is the repairing obligation fair? If a tenant is taking on a full repairing lease then this should always be limited by a schedule of condition (photos and text) to ensure that they are only responsible for reinstating the premises to the condition it was in when they took it on.

These are only some of the options to consider and at Prettys you can be confident that we will tailor our advice to your business and your premises. If you would like further legal advice on Heads of Terms or any commercial leasehold transaction then please contact Rebecca Cleal, Senior Associate at Prettys on 01473 298250 or by email to RCleal@prettys.co.uk