Now that you have found a commercial property to rent, it’s time for the key terms of the proposed lease to be agreed with the landlord, or their agent, and for those terms to be set out in a set of Heads of Terms (‘HoTs’). The following are some points that should be considered when agreeing these HoTs:

1 Subject to Contract

Whilst the HoTs are intended to set out the key terms, they are not intended to be binding on the parties. The HoTs and correspondence in relation to the proposed letting should be headed ‘Subject to Contract’.

2 Sufficient Detail

Whilst neither the landlord, nor you, will want to spend significant time negotiating the HoTs, the key terms of the proposed letting should be clearly set out.

3 Key Terms

The following terms are often included:

• Property – the exact extent of the property to be let, and any parking rights, should be agreed at an early stage (preferably shown on a plan).

• Break right(s) – without a formal break right you cannot bring the lease to an end early without the agreement of the landlord (which they may not agree to or may require payment of a sum of money for). Break rights can either be on fixed dates or on a “rolling” basis throughout the term with a set period of notice to be given in each case.

• Rent – what is the annual rent and how often is this to be paid (usually quarterly or monthly in advance). Such rent will be exclusive of VAT (check whether VAT is payable).

• Rent-free period – will you have the benefit of a rent-free period (for example to allow fitting-out of the Property before opening or use).

• Rent review – the landlord may require the ability for the rent to be reviewed at set periods (but usually only where the lease is for five-plus years). Whilst this is usually by way of an upwards-only review to the level of the market rent on an agreed date (or dates), there are alternatives (e.g., any increase is linked to an index, such as Retail Prices Index ‘RPI’, allowing any increase to be easily determined).

• Repair – often HoTs will refer to the tenant having a full repairing liability. In this case, you would be obliged to put the Property into repair (even if not in repair when you take the lease). If the Property is in disrepair (early on you should instruct a surveyor to determine this), you should strongly consider having your repairing obligation limited to keeping the Property in the same state as when you entered into the lease (usually evidenced by a Photographic Schedule of Condition).

• Service charge – if the Property forms part of a larger building/estate it is usual for the landlord to recover a percentage of its costs for maintenance, repair, cleaning, etc, of the building/estate through a service charge. Details of any service charge (including recent service charge accounts) should be obtained. In addition, to avoid having to contribute towards costly repairs, you should consider whether there should be a cap on the service charge in any year.

• Security – the landlord may require you to provide a guarantor and/or rent deposit. You should consider if this request is reasonable. If it is, then each have their advantages and disadvantages (with a guarantor being personally liable for all liabilities of the tenant and a rent deposit possibly impacting cashflow with a sum being tied up for some or all of the term of
the lease).

• Permitted use – the permitted use of the Property and the ability to change this (subject to planning laws permitting this) should be clearly set out.

• Assignment and underletting – will you be allowed to assign (transfer) the lease or underlet (grant a lease for a shorter term)? If you are, this will usually be with the landlord’s consent (not to be unreasonably withheld).

• Security of tenure – is the lease to be granted with security of tenure (often referred to as being ‘inside the 1954 Act’ so that you are entitled to a new lease at the end of the term) or not? If not, then it would be entirely up to the landlord if they wish to offer you a new lease at the end of the term and they would have full discretion as to any lease terms they may be willing to offer.

• Landlord’s works – are there any works the landlord is to be required to carry out?

• “Covid Clause” – the Covid pandemic has led to some tenants requiring the landlord to include a clause in new leases suspending rent (or reducing it) should the tenant be prevented from trading due to Government measures.

4 Professional valuation advice

You should strongly consider obtaining professional advice from a surveyor or property agent on the HoTs.

5 (And finally, but not least) Instruct a solicitor

Serious consideration should be given to instructing a solicitor at an early stage to advise not only on the draft HoTs but also to avoid any delays once HoTs are agreed. A solicitor can also assist by confirming whether Stamp Duty Land Tax is payable (and the amount) as well confirming other likely costs such a Land Registry Registration Fees and costs payable to third parties.

If you require assistance, please contact our Commercial Property Team today who will be happy to assist you.