Heads of Terms for Commercial Lease UK

If you're entering into a commercial lease agreement in the UK, whether as a landlord or a tenant, one of the first steps in the process is agreeing on the heads of terms. These aren't just preliminary notes, they're a vital part of setting the foundation for your lease and ensuring everything runs smoothly from the start.

In this guide, we'll explain what heads of terms for a commercial lease are, why they matter, what they should include, and tips for landlords and tenants.

Table of Contents

What Are Heads of Terms in a Commercial Lease?

Heads of Terms (sometimes called 'letters of intent') outline the main terms agreed between a commercial landlord and tenant before the formal lease is drafted.

Although they are typically not legally binding, they set out the key elements both parties have agreed upon and help speed up the legal process by providing a clear framework.

By clearly stating the agreed rental terms, lease duration, and responsibilities, heads of terms UK provide a useful starting point for lawyers to draft the final commercial lease agreement. It can also speed up lease negotiations and reduce misunderstandings later on.

Are Heads of Terms Legally Binding in the UK?

In most cases, heads of terms in the UK are not legally binding, especially when marked "subject to contract", which is the standard practice. This phrase makes it clear that the document is a basis for further discussion, not a final agreement. However, certain clauses, such as confidentiality or exclusivity (also known as lock-out clauses), may be legally binding if both parties agree to them explicitly. It's always wise to get legal advice before signing heads of terms to understand which parts, if any, may carry legal weight.

Why Are Heads of Terms Important in a Commercial Lease?

Heads of terms are important because they serve as a roadmap for the full commercial lease agreement in the UK. By outlining key details early, such as rent amount, lease term, break clauses, and repair obligations, both the landlord and tenant can ensure they're on the same page before investing in legal drafting. This initial agreement helps reduce the chances of costly disputes during the lease negotiation stage and can expedite the entire leasing process.

Agreeing on heads of terms is a critical stage in any commercial property lease. Here's why they matter:

• They clarify expectations for both the landlord and the tenant early on.
• They help resolve potential disputes before legal costs are incurred.
• They provide a framework for the formal lease.
• They can be used to negotiate important terms such as rent, lease length, break clauses, and property use.

Whether you're a seasoned property investor or leasing a shop for the first time, understanding heads of terms can save you time, money, and stress.

Five Key Things You Should Know About Heads of Terms

Here, we'll break down five essential things you need to know about Heads of Terms, why they matter, and how they can help avoid future headaches in commercial property agreements.

1. Resolve Issues Early On
2. Use the Opportunity to Negotiate
3. Consider a Lock-Out Clause
4. Know What to Include
5. Mark It "Subject to Contract"

1. Resolve Issues Early On

One of the biggest benefits of Heads of Terms is that they allow both the landlord and tenant to iron out any major issues before investing time and money in drawing up the full lease.

Let's say there's a disagreement about who maintains the property or the frequency of rent reviews, these can be discussed upfront, saving both parties from costly surprises later.

2. Use the Opportunity to Negotiate

This stage is your chance to negotiate. Both sides can put forward their ideal terms and talk them through. If something doesn't work for you, like the proposed rent amount, lease length, or whether subletting is allowed, this is your chance to speak up and shape the deal.

3. Consider a Lock-Out Clause

A lock-out clause in the heads of terms can give you peace of mind during negotiations. It means that, for a set time, neither party can negotiate with anyone else. This avoids unnecessary pressure from third parties and gives both sides space to finalise the deal without distractions.

4. Know What to Include

It's vital to cover the right details in the heads of terms. While it's up to the landlord and tenant to agree on the specifics, here are some important points you should consider including:

• Details of the property (including any special rights like parking or loading bays)
• Length of the lease and any break clauses
• Rent amount and frequency of payment
• Repair obligations and service charges
• Whether the tenant can assign or underlet the premises

For helpful guidance on what to include in heads of terms, the RICS Code for Leasing Business Premises is a reliable starting point.

Click here to download the RICS Code

5. Mark It "Subject to Contract"

Most importantly, always state that the heads of terms are "subject to contract" or "not legally binding." This ensures there's no confusion and that both parties understand the document is just an outline, not the final agreement.

What Should Be Included in Heads of Terms?

Knowing what to include in heads of terms is crucial. A well-drafted document should cover the basics, such as the full address of the commercial property, the names of the landlord and tenant, the rent amount, the lease term, the payment schedule, and any break clauses.

It should also clarify who is responsible for repairs, insurance, and whether the tenant can assign or sublet the lease. Including these details helps ensure both sides are clear about their roles and responsibilities from the start.

Here's a breakdown of the essential things to include in Heads of Terms to avoid confusion, delays, or disputes later on.

1. Details of the Property

Start by clearly identifying the commercial property. Include the full address, description of the premises, and any shared or exclusive use areas. If the tenant is entitled to extras like parking spaces, loading bays, or signage rights, note those here too.

2. Parties Involved

List the full legal names and contact details of the landlord and tenant. If any third parties are involved, such as guarantors or managing agents, include their details as well.

3. Lease Term (Length of Agreement)

Specify the proposed length of the lease, for example, a 5-year or 10-year term. Mention any break clauses that allow either party to end the lease early, and when those can be triggered.

4. Rent and Payment Terms

Clearly outline the annual rent, how often it will be paid (monthly, quarterly, etc.), and whether VAT is included. Also, state if there will be rent reviews, and when these will take place.

5. Rent-Free Periods or Incentives

If the landlord is offering any rent-free period (often given at the beginning of a lease) or fit-out contributions, they should be mentioned here.

6. Use of the Property

Include a summary of the permitted use of the premises. For example, will it be used for retail, office space, or storage? This helps ensure both parties are on the same page from day one.

7. Repair and Maintenance Responsibilities

Set out who is responsible for repairs, maintenance, and decoration, both internally and externally. Clarify if the lease is a full repairing and insuring lease (FRI), where the tenant takes full responsibility for upkeep.

8. Alterations and Fit-Outs

Will the tenant be allowed to make alterations or refurbish the premises? If so, include any conditions (such as needing landlord's consent or restoring the property at lease end).

9. Assignment and Subletting

State whether the tenant can assign the lease to someone else or sublet part or all of the property. If allowed, note whether the landlord's consent is required.

10. Security Deposit and Guarantees

Include details of any security deposit the tenant must pay, as well as any guarantees or personal assurances being offered.

11. Insurance Arrangements

Clarify who is responsible for insuring the property, what is covered, and how premiums will be paid.

12. Service Charges

If the property is part of a larger building or estate, and service charges apply, include how these are calculated and what they cover (e.g. cleaning, lighting, communal maintenance).

13. Legal Costs

Confirm who will be responsible for paying the legal fees; both parties may agree to cover their own costs, or one side may agree to pay both.

14. Subject to Contract

Always include the phrase "subject to contract" to make it clear the Heads of Terms are not legally binding, and formal lease negotiations are still to come.

Can Tenants Negotiate the Heads of Terms?

Yes, absolutely. Commercial lease heads of terms are a negotiation tool, not a fixed contract. Tenants should feel empowered to discuss and amend any terms they're not happy with before signing.

Whether it's negotiating a rent-free period, requesting changes to repair obligations, or clarifying landlord and tenant responsibilities, this is the stage to do it. Once the lease is drafted, making changes can be more time-consuming and expensive.

Tips for Landlords and Tenants

Whether you're letting out your first commercial unit or taking on a long-term retail space, here are some expert tips:

For Landlords

• Be clear and transparent about your expectations.
• Ensure your heads of terms reflect your long-term property strategy.
• Seek legal advice to ensure your interests are protected.

For Tenants

• Don't feel pressured to accept terms that don't suit your business.
• Use this stage to negotiate rights like break clauses or fit-out permissions.
• Confirm whether you'll be responsible for full repairs (a "full repairing lease").

Do I Need a Solicitor to Help with Heads of Terms?

While heads of terms are typically non-binding, it's highly advisable to consult a commercial property solicitor when preparing or reviewing them. Legal professionals can help you understand the implications of the proposed terms, flag any missing clauses, and ensure the document properly reflects your interests before the binding lease agreement is prepared.

Need Help with Your Commercial Lease?

At Wembley Solicitors, our experienced commercial lease solicitors in London can guide you through every step of the leasing process, from heads of terms to signing your final lease.

To schedule a consultation with our expert commercial lease solicitors in London, please call us on 0203 417 3700 or email us at info@wembleysolicitors.com.

No matter where your commercial property is, our commercial lease solicitors provide legal services regarding commercial leases throughout England and Wales.